As I was preparing to draft a
speech on International Tax and Compensation Issues Effecting International
Executives for a Bloomberg tax conference the news broke regarding the
so-called “Panama Papers” and the thousands of politicians, millionaires and
executives who had attempted to hide their income and wealth in secret foreign accounts.
The irony of my informing international
companies as to how to minimize the foreign income taxes that a U.S. executive
would pay and the actions of the executive without regard to the consequences
to their employer hit me. The session at which I spoke was attended by
employees from the tax departments of international corporations as well as
partners and manager from the Big 4 accounting firms and international law
firms.
Foreign Corrupt Practices Act
of 1977
Few of the attendees had heard
of the Foreign Corrupt Practices Act of 1977 that applies to any person who has
a degree of connection to the United States and engages in foreign corrupt
practices and were unaware that the Act was actively used today to combat
foreign corrupt practices and to prosecute both U.S. and foreign corporations.
The more notable of successful prosecutions in the past 10 years are with
Biomet, BizJet, Hewlett Packard Company, KBR, Marubeni Corporation, News
Corporation, Siemens AG ($450 million fine), Smith & Nephew and Wal-Mart de
Mexico
Who Protects the Shareholders
Against the Actions of the Executives?
The answer is likely; nobody! If
that is correct then the question should be why? When I posed the question to
the group as to whether their company had a written policy requiring executives
to certify that they are in full compliance with; U.S. Federal and State
individual tax filings as well as all
laws of the foreign country in which they are on assignment, incredulously,
none had such a policy. When I posed
the question as to what their company would do if their CEO’s name appeared on
the list of 200 Americans named in the Panama Papers and the company stock
plummeted with this disclosure, the response was that nothing would be done
unless the CEO was found guilty by a Court.
An Executive On Foreign Assignment
Can Inadvertently be in Violation of U.S. and Local Laws
For example, would the executive
on assignment in Bermuda expect that the money market account that they opened
at their Bermuda bank be actually an investment in a Cayman Island company that
is classified as a Passive Foreign Investment Company for U.S. tax purposes? Or
that their Bermuda pension plan is a non-qualified plan for U.S. tax purposes
and that their contribution to the plan is not from pre-tax funds, that the
employer contribution to the plan is taxable when vested and that the current
investment earnings in the plan are taxable income? And that their Bermuda
pension plan is considered a “financial account” to be reported on FinCEN Form
114, Report of Foreign Bank and Financial Accounts.
Different investment
opportunities are also available to U.S executives on assignment in a foreign
country. As an example, a year or so ago a popular investment was to buy a
share in a venture whose sole purpose was to buy 1,000 cases of a French wine
such as Chateau Margaux and then sell everything in 5 years. Historically, this
should yield a 250% profit, even though the wine should be aged for another 10
years. If a U.S. executive decided to make such investment what would they have
likely done after doing so? Probably nothing.
But a reading of the fine print by a tax advisor would have indicated
that the U.S. executive was actually purchasing a share in a Hong Kong
partnership that required the U.S. executive to immediately file Form 8865. And
the question I asked is how did this Hong Kong entity manage to buy 1,000 cases
when the Chateau has historically only bottled 35,000 cases a year and had
likely sold those cases years ago?
Smaller Bermuda companies
without a U.S. connection typically do not provide a U.S. tax preparation
service to the few U.S. citizens on their Bermuda payroll nor provide them with
a tax preparation allowance. They do so at their peril, especially if the U.S.
citizen is a high ranking executive. Usually, the U.S. citizen will turn to
their tax advisor in the United States who is unlikely to know the nuances,
such as those just mentioned, and the likelihood of the U.S. tax return being
in error, from my experience, is 95%.
What Should an Employer Do
When an Executive On Assignment Makes a Bad Investment? Our fictional oil company executive has lived
in 15 cities in the United States in the last 30 years for his employer and is
now assigned to Bermuda on a 5 year assignment. The executive, against the
advice of the human resources department, takes their life savings and buys a
$5,000,000 ocean front home. Four years into the assignment a new Bermuda government
is elected, breaks its ties with the U.S. dollar and the Bermuda dollar is now
worth fifty cents. The employer cuts short the assignment and transfers the
executive to Tokyo. Who should bear the $2,500,000 loss? Answer; the employee.
But, it is incumbent on an employer to provide an employee with more than
assistance with moving household goods and family to a new assignment. Assistance
should also be given in such areas as language training, legal, business
conduct, dual careers, spousal assistance, schools for children and ongoing tax
preparation and consultation.
Pursuant to the requirements
relating to practice before the Internal Revenue Service, any tax advice in
this communication is not intended to be used, and cannot be used, for the
purpose of (I) avoiding penalties imposed under the United States Internal
Revenue Code, or (ii) promoting, marketing or recommending to another person
any tax related manner.
The tax advice given by this column is, by necessity,
general in nature. You should, of course, check with your own U.S. tax
consultant as to how specific transactions affect you since tax advice varies
with individual circumstances.
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