 US Citizens Abroad: New Filing Procedure and OVDP FAQsOn June 26, 2012, the IRS announced a new compliance procedure for certain US taxpayers living abroad who have failed to timely file US federal income tax returns or reports of foreign bank and financial accounts (FBARs), form TD F 90-22.1. Effective September 1, 2012, the new procedure applies to current non-US residents, including those who are dual citizens. The IRS also released FAQs for its open-ended 2012 offshore voluntary disclosure program (OVDP). New compliance procedures. To come forward under the new guidance, a taxpayer must file delinquent tax returns with appropriate related information returns for the past three years and delinquent FBARs for the past six years. Notably, the guidance allows a taxpayer to claim retroactive relief for failure to timely elect income tax deferral on certain retirement and savings plans, such as RRSPs and RRIFs, for which deferral is permitted by a tax treaty; the deferral elections for a taxpayer's non-US retirement plans must be made with the submission. Any tax and related interest must also be paid with the submission. Further guidance on the application procedure is expected before September 1, 2012. The IRS is expected to review all submissions, but the level of the review will vary according to the taxpayer's compliance risk. For taxpayers who present a low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions. For those who present a higher compliance risk, the IRS will conduct a more thorough review and possibly a full examination of the returns--in some cases, for more than three years--and on that basis will impose tax, interest, and any appropriate penalties in accordance with US federal income tax laws. The IRS refers taxpayers to its fact sheet FS-2011-13 (issued in December 2011) for more information on penalties that may be imposed. The level of compliance risk is based on certain information provided in the returns filed and on certain other information required in the submission. A low-risk taxpayer has simple returns with little or no US tax due. Absent any other high-risk factors, a taxpayer is generally considered to be low-risk if he or she has less than $1,500 in tax due in each of the three years. The risk level rises (1) as the taxpayer's income and assets increase, (2) if there are indications of sophisticated tax planning or avoidance, or (3) if the taxpayer has material economic activity in the United States. Additional risk factors include any additional history of non-compliance with US tax laws and the amount and type of US-source income. Before September 2012, the IRS is expected to release more information and guidance on how the level of compliance risk is determined. In order to claim reasonable cause for failure to file a tax return, an information return, or an FBAR, the taxpayer must submit a dated statement, signed under penalties of perjury, explaining the reasonable-cause justification for the failure to file. (Taxpayers are referred to fact sheet FS-2011-13 for examples of reasonable cause.) In addition, a taxpayer who seeks to file a late election to defer income from certain retirement or savings plans pursuant to a relevant treaty must submit (1) a statement that requests an extension of time to make an election to defer income tax and identifies the treaty position, (2) for relevant Canadian plans, a form 8891 ("US Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans") for each tax year and a description of the type of plan covered by the submission, and (3) a statement describing the event that led to the failure to elect; the events that led to the discovery of the failure; and, if the taxpayer relied on a professional adviser, the nature of the adviser's engagement and responsibilities. The IRS reminds taxpayers that this new procedure does not provide protection from criminal prosecution if the IRS and the Department of Justice determine that it is warranted in the taxpayer's particular circumstances. Furthermore, once a taxpayer makes a submission under this new procedure, the IRS's 2012 OVDP is no longer available. A taxpayer who is ineligible to participate in that OVDP is also ineligible to participate in this procedure. OVDP FAQs. The IRS released long-awaited FAQ guidance for its open-ended 2012 OVDP. The lookback period is the most recent eight tax years for which the US income tax return filing date (with valid extensions) has passed either with no income tax returns filed or with returns filed from which income was omitted. Thus, for a Canadian who did not file a 2011 US income tax return--or a request for an extension to file by October 15--by the June 15, 2012 deadline, the lookback period is 2004 through 2011. The OVDP requires payment of any US tax owing, interest, and mandatory penalties for late filing of US income tax returns and late payment of any US income tax due. The values of foreign accounts and other foreign income-producing assets are aggregated for each year, and the penalty is calculated at 27.5 percent of the highest year's aggregate value during the period covered by the voluntary disclosure. The rate of penalty is reduced to 5 percent for a taxpayer who did not reside in the United States during the lookback period, made a good-faith showing of timely compliance with all tax reporting and payment requirements in his or her country of residence, and has $10,000 or less in US-source income each year. The new FAQ guidance reaffirms that no penalties are imposed on a taxpayer who for the last eight years timely filed US income tax returns reporting all non-US income, and failed only to file FBARs and forms 3520 or forms 5471. In that case, a taxpayer may file the delinquent information returns with the appropriate processing centre (forms 5471 must be filed with amended income tax returns) and include a statement that explains why the information returns are being filed late. The IRS will not impose penalties for failure to file if the taxpayer was not previously contacted by the IRS regarding an income tax examination or a request for delinquent information returns. The new compliance procedure is welcome guidance for many US citizens living in Canada, particularly its inclusion of deferral elections for RRSPs and RRIFs. Some questions remain unanswered, but the available penalty relief should encourage US citizens who may have just learned of their US tax-filing requirements to come forward. Canadians should consult a US tax adviser to determine the appropriate approach to come into compliance with their US income tax and information reporting obligations. Marla Waiss and James M. Bandoblu Jr. Hodgson Russ LLP, Buffalo | |
| Canadian Tax HighlightsVolume 20, Number 8, August 2012 ©2012, Canadian Tax Foundation |
Canadian Mortgages, Insurance, Investment, Tax Planning
Tuesday, August 28, 2012
US Citizens Abroad: New Filing Procedure and OVDP FAQs
GST/HST Place of Supply for Services
GST/HST Place of Supply for Services
Coincident with the 2010 implementation of the HST in Ontario and British Columbia, the place-of-supply (POS) rules, which govern whether GST or HST applies on the supply of property or services, were revamped. In particular, the POS rules that govern the supply of intangible personal property and services were modified to focus more on the place of consumption and not the vendor's location, thus bringing the rules in line with one of the founding principles of a value-added tax. The June 2010 Technical Information Bulletin (TIB) B-103 contained various helpful examples that illustrated the changes, but many interpretive issues remained. The redraft of the bulletin, "Harmonized Sales Tax--Place of Supply Rules for Determining Whether a Supply Is Made in a Province"--was released in June 2012 for public comment and incorporates many new examples that answer some questions that were left hanging. The TIB redraft does not introduce new rules or significant new concepts, but its examples may be useful to taxpayers and practitioners who are struggling to understand the POS rules in the context of specific transactions.
A number of POS rules target specific services such as transportation, customs brokerage, telecommunications, and repair and maintenance. Other rules that encompass services in relation to real or tangible property apply if a sufficiently direct connection exists between the service and the underlying property. For example, the TIB redraft delineates a sales agent whose services do not "relate to a particular good that is known . . . to be situated at a particular location, but rather [consist] of the selling" of a generic good. Because the connection to specific identifiable goods is not sufficiently direct, the CRA is of the view that the POS rule for services in relation to tangible property is not relevant: instead, the general services rule (discussed below) applies.
If no specific rule fits the circumstances, the default rule is the general services rule, which focuses primarily on the address of the recipient--the person liable to pay for the service--as a proxy for the place of consumption. The general services rule establishes the POS and rate of tax by reliance in the first instance on the Canadian home or business address of the recipient that is obtained by the vendor in the ordinary course of business. The TIB redraft reiterates that such an address is relevant only if it is obtained in connection with the supply, but it does not have to be the address that is determined for every supply made to the recipient: thus, the relevant rule can vary from supply to supply. Notably, the CRA states that it must be reasonable for the supplier to be able to conclude, on the basis of information available to it or provided to it by the recipient, that a valid business address has been obtained. However, the redraft reaffirms that the supplier is not required to verify the validity or appropriateness of the address.
If more than one address is obtained, the POS is based on the one address that is most closely connected with the supply, as represented--in decreasing order of preference--by the contracting address, the address that the supplier has the most contact with, and the billing address. This hierarchy of addresses has led to a number of unresolved interpretive issues, including the question of which contracting address should be used when both a master services agreement and a statement of work or a purchase order (PO) exist, as is often the case. The TIB redraft sheds light on this question by citing the example of a recipient, headquartered in Ontario, that contracts with a consultant under a global framework agreement (GFA). The GFA incorporates definitions, the extent of the parties' liabilities, confidentiality obligations, performance standards, dispute resolution, and payment terms between the contracting parties. The GFA does not constitute an agreement for the supply of any specific services and does not impose an obligation on either party for future supplies: each regional office issues a PO for specific services under the GFA umbrella. The redraft concludes that the most closely connected business address is the one associated with the PO and not with the GFA, presumably because the PO-connected address is the locus of the actual supply, whereas the GFA-connected address is merely the locus of an agreement that establishes the relationship's ground rules in the event that a supply is made.
If there is no Canadian home or business address, the default POS is the place where the service is performed. The CRA interprets this POS to potentially include the location from which a person physically performs the work or the location of the supplier's equipment that is used to supply the service; the location where a report is prepared; and the location of a customer's property if the vendor can remotely access it to provide electronic services. Under the CRA's expanded interpretation, each supply must be analyzed to pinpoint the various locations where elements of the supply are performed before the predominant location can be determined.
Audrey Diamant
PricewaterhouseCoopers LLP, Toronto
Canadian Tax HighlightsVolume 20, Number 8, August 2012PricewaterhouseCoopers LLP, Toronto
©2012, Canadian Tax Foundation
Thursday, August 9, 2012
CAAMP Stats August 2012
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