Ireland: Finance Bill 2010

The Department of Finance issued its 2010 Finance Bill on 4 February 2010. Many of the measures contained in the Bill reflect the announcement made by the Minister last December during his annual Budget Speech to Parliament. However the Bill has provided clarification on a number of provisions in addition to introducing some new legislation.

The key provisions are: •

• The introduction of a “Domicile Levy” of EUR 200,000 for high net worth Irish citizens who are Irish domiciled but tax resident overseas.
• •The abolition of the remittance basis for returning Irish citizens. •
• The extension of the remittance basis for non-domiciled foreign citizens.
• •An extension of relief from the income levy to “Cross Border Workers” and employees resident in Guernsey, the Isle of Man and Jersey.
• •Increased reporting requirements for non-Revenue approved share schemes.
• •The restriction of certain reliefs on restricted share schemes to shares held in a trust or other vehicle based in the EEA.

Domicile Levy – minimum tax for Irish citizen’s resident abroad

With effect from 1 January 2010 all Irish citizens who are domiciled in Ireland will be liable to a “domicile levy” of EUR 200,000 where the following conditions are met:

• •their worldwide income exceeds EUR 1 million and ; •
• they have assets located in Ireland with a value in excess of EUR 5 million on 31st December of the relevant year

The domicile levy is subject to self assessment and is payable to the Revenue Commissioners on or before 31 October in the year following the year of valuation.

The levy payable will be reduced by the amount of income tax paid in Ireland in respect of the tax year ending on the valuation date.

Remittance basis - Irish citizens

With effect from 1 January 2010, Irish citizens will no longer be able to benefit from the remittance basis. This was previously available to them for the first 3 years after their return to Ireland, provided they had been tax resident abroad for at least 3 consecutive tax years.

Remittance basis – non Irish citizens

In 2008 special provisions were introduced, which restricted the amount of employment income liable to income tax in Ireland for non Irish domiciled individuals (foreign citizens) individuals assigned into Ireland from a non EEA country, who remained employed under a non EEA contract.

With effect from 1 January 2010, this provision has been relaxed with the result that employees seconded into Ireland from an EU or EEA countries, who are employed under an EEA contract, will now qualify for relief.

When this relief was introduced it was only available where the period of assignment into Ireland was for a period of at least 3 years. With effect from 1 January 2010 an assignment lasting 12 months or more will qualify on the condition that it is the first assignment into Ireland and the employee was never previously tax resident in Ireland.

This relief operates by restricting the amount of employment income liable to to the lower of: •

• Actual income earned or; •
• EUR 100,000 plus 50% of the employment income exceeding €100,000

However, if the aggregate of employment income received in, plus employment income remitted into Ireland, exceeds EUR 100,000 plus 50% of the excess above EUR 100,000, the aggregate amount will be subject to tax in Ireland.

Income levy

The Bill contains a number of technical amendments exempting certain internationally mobile employees from the income levy introduced in 2009. These levies are generally charged on all income at rates from 2% to 6%.

An exemption applies to persons who are on an Irish payroll, but who are resident in a country with which Ireland has a Double Taxation Agreement. This exemption has now been extended from 1 January 2010 to persons resident in countries with which Ireland has concluded an “Agreement Affording Relief from Double Taxation.” Ireland has concluded such agreements with Guernsey, the Isle of Man and Jersey.

The Bill also extends relief from the income levy to persons eligible for “Cross Border Workers” relief. This relief is available to employees who reside in Ireland, but who work in a country with which Ireland has a Double Taxation Agreement for a period of at least 13 weeks and who spend at least 1 day per week in Ireland.

Employee share scheme reporting

The Bill introduces a new automatic reporting requirement which will oblige employers who grant shares to employees or directors, other than under Revenue approved arrangements, to make an annual return of such awards. At present, such a return is only required if specifically requested by the Revenue Commissioners. The legislation also provides for the imposition of penalties for employers who fail to make the required returns or who fraudulently or negligently make incorrect returns.

Restricted shares

Irish legislation provides for a reduction in the taxable value of shares granted to employees where the shares are subject to a restriction on disposal. To qualify for this relief, the shares must be held in a trust or other Revenue approved holding vehicle. The Bill specifies that in the case of shares held in a trust, the trust must be established in Ireland or in another European Economic Area (EEA) Member State, and that the Trustees must also be resident in such a State. This provision may present difficulties for non-EEA companies operating such schemes in which Irish employees participate.

Next steps

Irish citizens who are tax resident outside of Ireland and who hold assets in Ireland in excess of EUR 5 million should note that they may be liable to the Domicile Levy if their worldwide income exceeds EUR 1 million. Employers and assignees should review the costings of assignments to Ireland in light of the changes to the remittance basis and the extension of relief from the income levy. Employers with share remuneration schemes which are not Irish Revenue approved should put systems and controls in place to deal with the new reporting requirements. Employers with restricted share schemes where the shares are held in vehicles outside of the EEA should review their remuneration schemes for Irish based employees in light of the changes.

Source: Ernst & Young

U.K. and Follow up on Statement of Practice 01/09

Her Majesty’s Revenue & Customs (HMRC) in the U.K. has announced that legislation will not be introduced until the 2011 Finance Act concerning (this legislation would have replaced Statement of Practice 01/09 regarding resident but not ordinarily resident taxpayers).  SoP 01/09 will now apply for the U.K. tax year ending 5 April 2011, with one amendment regarding joint accounts.  This amendment will apply to all qualifying bank accounts for periods on or after 6 April 2009.

Ordinarily resident (RNOR) employees are taxable on their earnings for U.K. duties whether the employee’s earnings are paid in the UK or not. However, if such an employee elects for the remittance basis, the employee’s earnings for non-U.K. duties are only taxed in the United Kingdom if remitted to the United Kingdom.

In our earlier newsletter, we explained the changes to the rules regarding the remittance of employment income of RNOR employees for the two years ending 5 April 2010. In particular, we explained that RNOR employees could simplify their compliance burden if they established they were within Statement of Practice (“SoP”) 01/09. SoP 01/09 was expected to be replaced by legislation with effect from 6 April 2010. Her Majesty’s Revenue & Customs (HMRC) has now announced that this legislation will not be introduced until the 2011 Finance Act1. SoP 01/09 will now apply for the U.K. tax year ending 5 April 2011, with one amendment regarding joint accounts. This amendment will apply to all qualifying bank accounts for periods on or after 6 April 2009.

SoP 01/09 as It Originally Applied for the 2009/2010 Tax Year

Broadly speaking, the SoP said that, for a R/NOR employee using the remittance basis for earnings arising from non-U.K. duties:

• it will be possible to look at transfers made from a bank account (see below regarding the types of account covered) for the U.K. tax year as a whole, rather than needing to examine each individual transfer;

• HMRC is prepared to accept that there is a remittance of earnings for non-U.K. duties only where the total general employment earnings remitted to (or paid in) the U.K. exceed the amount of general employment earnings attributed to U.K. duties; and

• general employment earnings may be apportioned, provided it is appropriate to do so, between U.K. and non-U.K. duties on the basis of work days worked in the relevant period, rather than the number of total days in the period.

However, the SoP would not apply to the earnings of a R/NOR employee if the earnings are:

• paid into a joint account; or

• mixed with earnings of another individual; or

• mixed with earnings of another employment; or

• mixed with non-employment income, except for interest arising on the bank account; or

• mixed with capital gains, except for gains arising from foreign exchange transactions in respect of the funds in that account and those arising on employee share scheme-related transactions.

Proceeds (other than a gain, which is already covered above) from employee share scheme-related transactions in respect of amounts paid by the employee in acquiring the shares, may also be paid into the bank account without invalidating the use of the new SoP.

HMRC Amendment to SoP 01/09

HMRC has announced it will now be possible to act upon the SoP and have earnings paid into a joint bank account provided the other account-holder:

• is the spouse or civil partner of the employee, and

• that individual has no income or gains of his/her own in the account apart from a share of interest arising on the account.

HMRC has said this change will apply to all accounts that qualify for SP 01/09 on or after 6 April 2009.

KPMG Note

RNOR employees who already have bank accounts within the existing SoP may not wish to disturb their current arrangements. Having said that, if they wanted to consider having separate accounts for earnings attributable to each U.K. tax year to exercise a wide degree of flexibility when arranging remittances to the U.K., then any new accounts could now be joint accounts, provided the above conditions are met.

Source: KPMG

Jamaica Has New Tax Rates

Since January 1, 2010, the new tax-free threshold for taxpayers in Jamaica is $441,168 per annum. The new higher tax on individuals earning above $5 million annually was touted by the government as a temporary measure. (The higher 27.5- and 35-percent rates are scheduled to expire at the end of Fiscal Year 2010/11, that is, by March 31, 2011.)

Other

Under new revenue raising measures introduced by the government on January 1, 2010, the standard rate of General Consumption Tax (GCT) was increased from 16.5 percent to 17.5 percent.

Additionally, since that date, a progressive tax system has been in effect as follows:

(All dollar figures are Jamaican dollars unless otherwise indicated (J$ 1 = US$ 0.0112).)

Source: KPMG

EU Social Security Regulations Update

On 1 March 2010, initial guidance1 was released by the U.K.’s HM Revenue & Customs (HMRC) on the practical implementation of the new European Union (EU) social security rules, effective 1 May 2010, as contained in Regulations (EC) 883/2004, 987/2009, and 988/2009.2 It is expected that in the coming weeks HMRC will issue further comments in the form of frequently asked questions and that the social security authorities in other member states will issue their practical guidance.

The latest guidance is summarized below:

• The E101 and E102 will be replaced by a Form A1. (‘E’ forms generally will be revamped, with changes expected to health-care documentation, including the E106, although the European Health Insurance Card will continue to be issued after May 2010.3)

• The U.K. has chosen to opt out of the anticipated extension of the new rules to third country nationals legally resident in a member state. There is no update on whether Iceland, Liechtenstein, Norway, and Switzerland will adopt the new Regulations. It will therefore be necessary to continue to refer to the current rules.4

• The details of how the transitional rules will work in practice are still under discussion and further transitional rules could be introduced before May.

• HMRC refers to the new rules, which will be introduced to determine the social security position for those regularly working in several member states. No additional guidance has been included on the practical application of the 25-percent working time and/or remuneration test.

• HMRC states that where an employee is subject to National Insurance Contributions (NIC) then an employer in another member state will have a (new) obligation to operate NIC even though it does not have a place of business in the United Kingdom.

KPMG Note

Imposing the obligation to operate NIC on non-U.K. based companies represents a shift in HMRC practice and it is not yet understood how this will be practically enforced. It will affect those limited cases where there is no ‘host employer’ that is required to assume these responsibilities on behalf of the overseas employer. The availability of the transitional rules should be considered for any situations under the current regulations where only employee NIC is due.

• A new Decision A2, which is not yet finalized, will replace current guidance in Administrative Commission Decision 181 on the requisite conditions for an E101/A1 under the ‘posting’ rules.

KPMG Note

A draft version of this Decision sets out a minimum period of coverage in a member state’s social security scheme prior to a posting of one month for employees and two months for the self-employed. This may change prior to 1 May 2010, but if implemented as planned, it would represent a change in practice for many member states, although would provide more certainty as to whether an E101/A1 will be available.

• Practical details will follow on how HMRC will use the regulations in the area of cross-border enforcement of social security debts.

• The electronic exchange of information may be in place in 2011, but will not be running in the U.K. until 2012.

KPMG Note

While HMRC’s comments are welcomed, further guidance is awaited from both the Commission, generally, and member states on some open issues, including Decision A2, the 25-percent substantial activity test for multi-state workers, and the impact on transport workers. With only two months remaining until the 1 May implementation date, this will not leave employers much time to act in response to any changes.

Source: KPMG

Singapore Budget for 2010

On 22 February 2010, Mr. Tharman Shanmugaratnam, Singapore’s Minister for Finance, delivered the Budget Statement for the Financial Year 2010.1 We highlight below those measures affecting individuals that were announced in the budget. (All dollar figures expressed are Singapore dollars.)

For a complete budget analysis, as well as scheduled client roundtables and seminars on the budget, see the Web site for the KPMG International member firm in Singapore, at: http://www.kpmg.com.sg/ .

Reduction in Withholding Tax Rate for Nonresident Public Entertainers

Present Position: Nonresident  public entertainers are subject to withholding tax at the rate of 15 percent on income derived from performances in Singapore. Public entertainers include stage, radio or television artistes, athletes, or individuals exercising a profession, vocation, or employment of a similar nature.

Proposed Change: The withholding tax rate would be reduced to 10 percent.

Effective: Payments made from 22 February 2010 to 31 March 2015.

Comments: The proposed change is in line with the government’s goal to develop Singapore as a leading sports and entertainment hub in Asia. The timing of this proposed change should be a welcome boost for business and tourism alike with the opening of Singapore’s Integrated Resorts and the inaugural Youth Olympic Games, both taking place this year.

Extension of Enhanced Tax Deduction on Donations

Present Position: Donations made to an Institution of Public Character and other approved beneficiaries (such as approved museums, prescribed educational and research institutions in Singapore) generally qualify for double tax deduction. For donations made between 1 January 2009 and 31 December 2009 (both dates inclusive), an enhanced 250-percent tax deduction is allowed.

Proposed Change: The enhanced tax deduction of 250 percent would be extended for another year for donations made from 1 January 2010 to 31 December 2010 (both dates inclusive).

Effective: Year of Assessment (YA) 2011 only.

Comments: The proposed extension of the enhanced deduction scheme would serve to promote greater charitable giving in the wake of the country’s economic recovery.

Tax Deduction for “Angel” Investors

Present Position: Currently, the cost of equity investments is not tax deductible as it is capital in nature.

Proposed Change: A new incentive would be introduced to encourage greater angel investment from private individuals with appropriate investment and business expertise to provide financing and to add value to start-ups. Details of the new incentive are as follows:

• The approved angel investor has to commit at least $100,000 of equity investments in a qualifying start-up in a YA.

• The approved angel investor would be eligible for a tax deduction of 50 percent of his/her investment at the end of a two-year holding period.

• The tax deduction is subject to a cap of $500,000 of equity investments in a qualifying start-up per YA.

• The incentive applies to qualifying investments in qualifying start-ups made during the effective period.

• The incentive would be administered by SPRING Singapore.

Effective: 1 March 2010 to 31 March 2015 (both dates inclusive).

Comments: The new incentive would assist start-ups to secure financing at the early stage of their growth and it aims to attract investors to nurture start-ups. An angel investor who qualifies for the incentive would enjoy a maximum tax saving of $50,000 per YA. To qualify, the angel investors would have to seek approval from SPRING Singapore. There would also be qualifying conditions for both the investments and the start-ups. SPRING Singapore would release more details of the incentive by June 2010.

Increase in Parent Relief

Present Position: A resident taxpayer may claim parent/handicapped parent relief if he/she is supporting his/her spouse’s parents, grandparents, or great-grandparents who must:

• be living in Singapore;

• be 55 years old or above or physically/mentally handicapped; and

• not have income of more than $2,000 per dependant in the year.

The relief for each dependant is summarized below:

Parent Relief Handicapped Parent Relief

Dependant is:

not staying with taxpayer $3,500 $6,500

staying with taxpayer $5,000 $8,000

Proposed Change: The increased relief for each dependant is summarized below:

Parent Relief Handicapped Parent Relief

Dependant is:

not staying with taxpayer $4,500 $8,000

staying with taxpayer $7,000 $11,000

All existing qualifying conditions (as mentioned above) for parent relief continue to apply, except for the current income threshold of $2,000 that would be increased to $4,000.

Effective: YA 2010.

Comments: With the declining birth rate, more elderly dependants are supported by fewer children and by increasing the relief, the government is recognizing the contribution of those who look after their parents, grandparents, and great grandparents in their old age.

Expansion of Wife Relief to Spouse Relief

Present Position: Only a husband who is a resident taxpayer is entitled to claim wife relief of $2,000, if he is living with her or supporting her provided her income is not more than $2,000 in the year.

Proposed Change: The wife relief would now be known as spouse relief. It would be available to either husband or wife who supports his/her dependant spouse who has annual income not exceeding $4,000.

Effective: YA 2010.

Comments: With spouse relief, female resident taxpayers would be accorded the same benefit provided to male resident taxpayers.

Enhancement of Reliefs for Dependants

Present Position: The annual income of a dependant must not be more than $2,000 in the preceding year in order for a resident taxpayer to claim one of the following reliefs:

• Wife Relief

• Parent Relief

• Qualifying Child Relief

• Working Mother’s Child Relief

• CPF Cash Top-up Relief for top-up to CPF account of spouse or siblings

• Handicapped Child Relief

• Handicapped Spouse Relief

• Handicapped Parent Relief

• Handicapped Sibling Relief.

Proposed Change: The current annual income threshold of $2,000 would be increased to $4,000. In addition, for handicapped dependant-related reliefs, the annual income threshold condition would be removed.

Effective: YA 2010 (except for CPF Cash Top-up Relief for top-up to the CPF account of one’s spouse or siblings, where the changes to the annual income threshold would be effective from YA 2011).

Comments: The government recognizes the efforts of taxpayers in supporting family members who are genuinely dependent, in particular, the extra resources and attention needed in taking care of the disabled.

Increase in Course Fees Relief

Present Position: Resident individuals who are gainfully employed can claim relief for course fees of up to $3,500 incurred for attending qualified courses in the year preceding the YA. Allowable course fees include registration or enrolment fees, examination fees, tuition fees, and aptitude test fees (for computer courses). Living expenses, textbooks, and travelling expenses are not allowed.

Proposed Change: The relief for course fees would be increased to $5,500.

Effective: YA 2011.

Comments: The increase in course fees relief for individuals who upgrade themselves reaffirms the government’s commitment to and support for life-long learning.

Review of Existing Property Tax Rebate for Owner-Occupied Residential Properties

Present Position: Currently, the property tax rate for owner-occupied residential properties is at a concessionary 4-percent rate instead of the 10-percent rate for all other properties. Furthermore, owner-occupied residential properties with an annual value (AV) lower than $10,000, can enjoy the on-going 1994 property tax rebates ranging from $25 to $150, depending on the AV of the property.

Proposed Change: The 1994 property tax rebates would be replaced with the following progressive tax schedule:

• 1st $6,000 of AV: 0 percent

• Next $59,000 of AV: 4 percent

• AV balance in excess of $65,000: 6 percent.

Non-owner occupied residential properties and other properties would continue to be taxed at the 10-percent rate of their AV.

Effective: January 2011.

Comments: Due to the tax exemption on the first $6,000 of the AV and the progressive tax rates for the balance in excess of $6,000, the proposed property tax system for owner-occupied residential properties would benefit individual home owners of properties with an AV not exceeding $77,000. For owner-occupied residential properties with an AV of more than $77,000, there would be a small increase in property taxes.

Top-Up to CPF Medisave Accounts

The government would provide a one-off top-up to the CPF Medisave Accounts of older Singaporeans aged 50 and above in 2010. Depending on the assessable income (AI) and the AV of the home in 2009, the amount of top-up would be up to $500.

Top-Up to Post-Secondary Education Accounts (“PSEA”)

Present Position: The PSEA scheme was set up in 2007 under which the government would provide a cash top-up to encourage every Singaporean to complete post-secondary education. The amount of top-up in 2009 ranged from $100 to $400 depending on the age of the child and the AV of the child’s home.

Proposed Change: The amount of top-up for children between 13 and 20 years of age in 2010 would be up to $500 instead of $400. The amount of top-up for children between 7 and 12 years of age would remain unchanged.

Source: KPMG

U.K. Court Cases and Tax Residence

Two judgements have recently been issued by the U.K. courts regarding U.K. tax residence which will have implications for certain international assignees inbound to and outbound from the United Kingdom. The first, the Gaines-Cooper case1, concerns the circumstances in which an individual ceases to be U.K. tax resident, while the second, the Tuczka case2, involved a non-U.K national and considers when someone becomes ordinarily resident in the United Kingdom.

Gaines-Cooper Case

Mr. Gaines-Cooper had claimed to have become non-U.K. resident by virtue of meeting the day-count test (see below) for someone leaving the U.K. permanently or indefinitely. He had lost on this point in the lower courts, but this hearing concerned a judicial review about whether the U.K tax authorities (HMRC) had correctly applied their guidance on residence, then published in booklet IR20, and whether they had unlawfully refused to apply that guidance. The case also involved two other individuals, Mr. Davies and Mr. James, and whether they could rely on the guidance in IR20 concerning those who go to work full-time abroad and the somewhat different circumstances in which they can shed their U.K. resident status.

The judges confirmed in the case the importance of the principle that HMRC should be required to abide by its guidance, but concluded that the taxpayers were not within the guidance. Although the judgement is unanimous, Lord Justice Ward expresses some “considerable hesitation” in agreeing with the judgement of his colleagues.

The judgement also contained a great detail of comment on the tests that an individual needs to satisfy to become non-U.K. resident. Firstly, taking full-time work abroad, the requirement then (as now) is broadly that an individual leaves the U.K. to work full-time abroad under a contract of employment for a complete U.K. tax year (a U.K. tax year is from 6 April to 5 April) and that any visits to the United Kingdom:

• are less than 183 days per year, and

• average less than 91 days in any tax year.

Alternatively, an individual may be regarded as non-U.K. resident if he or she leaves the U.K. permanently or indefinitely (for at least three years) and visits to the U.K. are within the limits described above. The point made by the judges was that, in thecontext of the IR20 guidance, they considered that a distinction had been made by HMRC between “leaving” the U.K for full-time work abroad and leaving the U.K. permanently or indefinitely. This is discussed further below.

KPMG Note

The important point, when leaving permanently or indefinitely (for at least three years), is the need to leave the U.K in terms of social, economic, and other ties to the U.K., rather than simply applying a pure day-count test. The judges said that HMRC was entitled to look at the individual’s connections with the U.K., including whether his family has remained in the U.K., when considering whether the individual had made a “clean break” with the U.K. and, crucially, that the IR20 guidance had indeed reflected this position.

Very significantly, for multinational employers and their employees, the judgement clarifies that this requirement for a “clean break” does not apply if the individual goes to work full-time abroad under a contract of employment for a complete U.K. tax year. There is, under these circumstances, no requirement for there to be such a “clean break.” Again, the judges considered that this was clear from IR20; the problem for Mr. Davies and Mr. James was that they did not apparently satisfy the requirement to have worked full-time abroad over the relevant period.

A point not covered in the judgement is precisely what is meant by “working full-time abroad.” If for example, an individual worked in the U.K. one day a week he could keep within the 183 and 91 day rules, but would he then be regarded as working full-time abroad? Infrequent business visits to the U.K. may be acceptable, but when do they become too frequent?

KPMG LLP (U.K.) will endeavour to seek clarity on this point from the U.K. tax authorities.

Tuczka Case

Individuals can be regarded as U.K resident and ordinarily resident (ROR) or resident but not ordinarily resident (RNOR).

The distinction is important because, with one exception involving employment with no U.K. duties, ROR employees are taxable on their worldwide earnings whether remitted to the U.K. or not. RNOR employees are taxable on their earnings for U.K. duties whether the employee’s earnings are paid in the U.K. or not. Such employees, however, can elect for the remittance basis and then their earnings for non-U.K. duties are only taxed in the U.K. if remitted to the United Kingdom.

It is HMRC practice3 to treat individuals who come to the U.K. with the intention of remaining for less than three years as not ordinarily resident in the United Kingdom. Individuals who come to the U.K. with the intention of remaining for three or more years are regarded as ordinarily resident in the U.K. from their date of arrival.

Additionally, HMRC will regard individuals as ROR in the U.K. if they occupy rented property under a lease of three years or more or they purchase property in the U.K. even when their intention was to remain for less than three years. Under such circumstances HMRC will review the residence status if the individual does leave within three years and sells the property.

Uncertainty has arisen because individuals who originally intended to remain in the U.K. for less than three years sometimes remain for more than three years. The question then arises when did/do they become ordinarily resident?

As explained in Flash International Executive Alert 2009-155, (14 August 2009) HMRC was going to publish revised guidance on this point. This amended guidance was to be published as a revised version of HMRC64. (HMRC6 replaced IR20 as HMRC’s general guidance on residence). This revision was delayed, however, by the judicial review in the Gaines-Cooper case.5

Dr. Tuczka claimed to have no intention of remaining in the U.K. for three years. He arrived in the U.K. in July 1997, but was held to be ordinarily resident for the years 1998/1999, 1999/2000, and 2000/2001. In reaching this decision, one factor that was considered – albeit not on its own being determinative – was that Dr. Tuczka purchased a flat and lived there with his future wife who was in the U.K. on a training contract that would last for more than three years. In the words of the Judge:

One factor in considering this question is Dr. Tuczka’s decision to purchase the Notting Hill flat. In our view this is not determinative of the question; it is an added factor demonstrating that his purpose in living in London for the time being was settled. Even without the purchase of the flat, we consider that the evidence shows Dr. Tuczka to have become ordinarily resident during 1998-99. He chose to remain in London for a settled purpose, namely his employment, and adopted a pattern of living which in fact continued until 2002 (and, with certain changes, subsequently).

KPMG Note

HMRC always look closely at claims to be not ordinarily resident when an individual remains in the U.K. for more than three years. HMRC typically looks to see whether the individual came to the U.K. for a settled purpose or, if not, whether circumstances changed so that there was a subsequent settled purpose in being in the U.K. and whether this occurred earlier than in the tax year of the third anniversary of arrival.

Individuals should not assume that they will automatically be regarded as not ordinarily resident for three years if they do not leave the U.K. before their third anniversary of arrival. If they become “settled,” they may become ordinarily resident at an earlier date. Employers of assignees to the U.K. should review the length their assignees are in the U.K. and, where business needs permit, consider the possibility of ending assignments before the third anniversary of arrival rather than shortly afterwards. The difference in taxation can be significant, particularly with the introduction of the 50-percent income tax rate. For tax-equalized individuals on net packages, the tax is 100 percent of the remuneration.

KPMG LLP (U.K.) believes it would be a good idea if HMRC were to amend HMRC6 to reflect the judicial decisions in these two cases and to add guidance regarding the meaning of “working full-time abroad.”

Source: KPMG

U.S. Proposed Regs, Other Guidance on FBAR

On February 25, 2010, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) released for publication in the Federal Register a notice of proposed rulemaking1 concerning proposed changes to the regulations implementing the Bank Secrecy Act with respect to reports of foreign financial accounts on Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).

On February 26, 2010, the U.S. Internal Revenue Service (IRS) released Notice 2010-232 and Announcement 2010-16,3 which clarify certain filing requirements for taxpayers that otherwise might be required to file the FBAR by June 30, 2010.

These three developments — the proposed regulations, Notice 2010-23, and Announcement 2010-16 — are discussed in turn below.

1. Proposed Regulations

The proposed regulations implementing the Bank Secrecy Act would:

• clarify who must file reports of foreign financial accounts, and which accounts are reportable;

• exempt certain persons having signature authority (or other authority) over foreign financial accounts from having to file the reports;

• include provisions intended to prevent “United States persons” from avoiding the reporting requirements.

Included in the issuance of the proposed regulations, the IRS released draft instructions to the FBAR that incorporate the proposed changes.

KPMG Note

The notice of proposed rulemaking does not indicate whether the proposed rules would apply to reporting for calendar year 2009.

Comments concerning the notice of proposed rulemaking are due within 60 days of the date of its publication in the Federal Register (which occurred on Friday, February 26, 2010).

a. Background

The Bank Secrecy Act (codified under Titles 12 and 31 of the U.S. Code) was enacted to address perceived abuses of foreign financial accounts, and authorized the Treasury Secretary to issue regulations requiring persons to keep records and file reports relating to such accounts.

Under existing regulations, each person subject to the jurisdiction of the United States having a financial interest in — or signature or other authority over — a bank, securities, or other financial account in a foreign country must report certain information to the IRS.

The rules require that when the aggregate value of foreign financial accounts exceeds $10,000 during a calendar year, the FBAR must be filed by June 30 for accounts maintained during the previous calendar year. Also, records must be maintained for a period of five years by any person having a financial interest in, or signature or other authority over, the account(s).

In 2003, enforcement authority for the FBAR was re-delegated to the IRS. Under this authority, in 2008, the IRS revised the FBAR form (Form TD F 90-22.1). The revised form expanded the definition of United States person, and sought to clarify the scope of foreign financial accounts that triggered the FBAR filing requirements.

In response to comments, the IRS issued Announcement 2009-51 which addressed the 2008 reporting responsibility of non-U.S. persons. (For prior coverage, see Flash International Executive Alert 2009-104, June 5, 2009.)

The IRS also issued Notice 2009-62 which extended the FBAR filing deadline for 2008 and earlier calendar years to June 30, 2010, for certain filers and requested comments concerning FBAR issues, including the following issues (for prior coverage, see Flash International Executive Alert 2009-147, August 10, 2009):

• when a person with signature authority but no financial interest in a foreign financial account would be relieved of filing an FBAR for the account;

• whether to expand the filing exemption currently available to officers and employees of banks and certain publicly traded companies when they have signature or other authority over their employer’s account;

• when an interest in a foreign entity would trigger an FBAR filing requirement.

b. Proposed Rules: New Definitions

The FinCEN notice of proposed rulemaking includes definitions of:

• A “United States person” — a citizen or resident of the United States or a domestic entity (including corporation, partnership, trust, or limited liability company, regardless whether the entity has made an election to be disregarded for federal income tax purposes). A domestic entity for this purpose would be an entity organized in, or under the laws of, the United States. A U.S. resident is defined by reference to Internal

Revenue Code (IRC) section 7701(b) and the accompanying regulations, but using the Title 31 definition of “United States” instead of the IRC (Title 26) definition. The Title 26 definition of “United States” includes the 50 states and the District of Columbia, together with the territorial waters and certain submarine areas; the Title 31 definition includes the 50 states and the District of Columbia, the Indian Lands (as defined in the Indian Gaming Regulatory Act), and the Territories and Insular Possessions of the United States.

KPMG Note

The proposed regulations adopt the more limited approach of past years as to who must file the FBAR by eliminating those persons “in and doing business in the United States” from reporting. Thus, this proposed change appears to generally eliminate the current instructions’ requirement of reporting by foreign persons.

• Types of “reportable accounts” — bank, securities, and other financial accounts in a foreign country, including an insurance policy with a cash value, an annuity policy, and a mutual fund or similar pooled fund that issues shares available to the general public with regular net asset value determinations and regular redemptions. The issue regarding whether hedge funds or other alternative investment funds would be treated as financial accounts for FBAR reporting purposes was “reserved” by Treasury.

KPMG Note

These definitions are intended to clarify the scope of individuals and entities that would be required to file the FBAR and the types of accounts for which an FBAR must be filed.

• “Financial interest” — the proposed rules state that United States persons have a financial interest in each bank, securities, or other financial account in a foreign country for which they are the owners of record or hold legal title, regardless whether the account is maintained for their own benefit or for the benefit of others. If an account is maintained in the name of more than one person, each United States person in whose name the account is maintained is deemed to have a financial interest in that account. The proposed rules address a financial interest when another is acting on behalf of the United States person and other situations giving rise to a financial interest. The proposed rules include an anti-avoidance rule that deems a United States person to have a financial interest in any account in a foreign country if the owner of record of that account is an entity created for a purpose of evading these rules.

c. Exception to Rules Concerning Signature or Other Authority

Under the proposed rules, certain exceptions from the FBAR requirements are provided for United States persons having signature or other authority over reportable accounts.

These exceptions generally apply to officers and employees of financial institutions that have a federal functional regulator (e.g., a bank that is examined by the Comptroller of the Currency) and certain entities that are publicly traded on a U.S. national securities

Revenue Code (IRC) section 7701(b) and the accompanying regulations, but using the Title 31 definition of “United States” instead of the IRC (Title 26) definition. The Title 26 definition of “United States” includes the 50 states and the District of Columbia, together with the territorial waters and certain submarine areas; the Title 31 definition includes the 50 states and the District of Columbia, the Indian Lands (as defined in the Indian Gaming Regulatory Act), and the Territories and Insular Possessions of the United States.

KPMG Note

The proposed regulations adopt the more limited approach of past years as to who must file the FBAR by eliminating those persons “in and doing business in the United States” from reporting. Thus, this proposed change appears to generally eliminate the current instructions’ requirement of reporting by foreign persons.

• Types of “reportable accounts” — bank, securities, and other financial accounts in a foreign country, including an insurance policy with a cash value, an annuity policy, and a mutual fund or similar pooled fund that issues shares available to the general public with regular net asset value determinations and regular redemptions. The issue regarding whether hedge funds or other alternative investment funds would be treated as financial accounts for FBAR reporting purposes was “reserved” by Treasury.

KPMG Note

These definitions are intended to clarify the scope of individuals and entities that would be required to file the FBAR and the types of accounts for which an FBAR must be filed.

• “Financial interest” — the proposed rules state that United States persons have a financial interest in each bank, securities, or other financial account in a foreign country for which they are the owners of record or hold legal title, regardless whether the account is maintained for their own benefit or for the benefit of others. If an account is maintained in the name of more than one person, each United States person in whose name the account is maintained is deemed to have a financial interest in that account. The proposed rules address a financial interest when another is acting on behalf of the United States person and other situations giving rise to a financial interest. The proposed rules include an anti-avoidance rule that deems a United States person to have a financial interest in any account in a foreign country if the owner of record of that account is an entity created for a purpose of evading these rules.

c. Exception to Rules Concerning Signature or Other Authority

Under the proposed rules, certain exceptions from the FBAR requirements are provided for United States persons having signature or other authority over reportable accounts.

These exceptions generally apply to officers and employees of financial institutions that have a federal functional regulator (e.g., a bank that is examined by the Comptroller of the Currency) and certain entities that are publicly traded on a U.S. national securities

fund” as applying to funds other than mutual funds with respect to FBARs for calendar year 2009 and prior years. Notice 2010-23 also specifically provides that the IRS will not apply its enforcement authority adversely in the case of persons with a financial interest in, or signature authority over, any other foreign commingled fund with respect to that account for calendar year 2009 and earlier calendar years. A financial interest in, or signature authority over, a foreign hedge fund or private equity fund is included in the administrative relief provided in the preceding sentence and is not required to be reported on the FBAR for calendar year 2009 and earlier calendar years.

KPMG Note

Notice 2010-23 does not address whether FBAR reporting related to a foreign commingled fund for 2010 may be required to be filed by June 30, 2011. It is expected that this issue will be addressed in guidance in effect in 2011.

• FBAR-Related Questions on Federal Tax Forms — Provided there are no other reportable foreign financial accounts for the year in question, a taxpayer who qualifies for the filing relief provided in Notice 2010-23 is to put a checkmark in the “no” box in response to FBAR-related questions found on federal tax forms for 2009 and earlier years (such questions ask about the existence of a financial interest in, or signature authority over, a foreign financial account).

3. Announcement 2010-16

Announcement 2010-16 suspends, for persons who are not U.S. citizens, U.S. residents, or domestic entities (e.g., U.S. corporations, U.S. partnerships, U.S. trusts, or U.S. estates), the requirement to file the FBAR for 2009 and earlier calendar years. This IRS announcement also states that all persons may rely on the definition of “United States person” contained in the July 2000 version of the FBAR instructions to determine if they have an FBAR filing obligation for 2009 and earlier years.

KPMG Note

This reliance on the more limited definition of “United States person” is a continuation of the relief provided last year in Announcement 2009-51, and appears to be relevant for FBAR-related questions on certain 2009 federal income tax returns. Announcement 2010-16 was apparently issued in light of the fact that the proposed regulations (discussed above) may not yet be relied upon.

fund” as applying to funds other than mutual funds with respect to FBARs for calendar year 2009 and prior years. Notice 2010-23 also specifically provides that the IRS will not apply its enforcement authority adversely in the case of persons with a financial interest in, or signature authority over, any other foreign commingled fund with respect to that account for calendar year 2009 and earlier calendar years. A financial interest in, or signature authority over, a foreign hedge fund or private equity fund is included in the administrative relief provided in the preceding sentence and is not required to be reported on the FBAR for calendar year 2009 and earlier calendar years.

KPMG Note

Notice 2010-23 does not address whether FBAR reporting related to a foreign commingled fund for 2010 may be required to be filed by June 30, 2011. It is expected that this issue will be addressed in guidance in effect in 2011.

• FBAR-Related Questions on Federal Tax Forms — Provided there are no other reportable foreign financial accounts for the year in question, a taxpayer who qualifies for the filing relief provided in Notice 2010-23 is to put a checkmark in the “no” box in response to FBAR-related questions found on federal tax forms for 2009 and earlier years (such questions ask about the existence of a financial interest in, or signature authority over, a foreign financial account).

3. Announcement 2010-16

Announcement 2010-16 suspends, for persons who are not U.S. citizens, U.S. residents, or domestic entities (e.g., U.S. corporations, U.S. partnerships, U.S. trusts, or U.S. estates), the requirement to file the FBAR for 2009 and earlier calendar years. This IRS announcement also states that all persons may rely on the definition of “United States person” contained in the July 2000 version of the FBAR instructions to determine if they have an FBAR filing obligation for 2009 and earlier years.

KPMG Note

This reliance on the more limited definition of “United States person” is a continuation of the relief provided last year in Announcement 2009-51, and appears to be relevant for FBAR-related questions on certain 2009 federal income tax returns. Announcement 2010-16 was apparently issued in light of the fact that the proposed regulations (discussed above) may not yet be relied upon.

Source: KPMG

Brazil Publishes New Rules for Taxpayers Exiting the Country

Individuals residing in Brazil who leave Brazil’s national territory will have to complete and submit, in addition to the Final Income Tax Return (Declaração de Saída Definitiva do País), a Notice of Definitive Exit from the Country (Comunicação de Saída Definitiva do País).

This rule change is in accordance with the SRF Normative Instruction 208, of September 27, 2002, which was amended by the RFB Normative Instruction 1008 of February 9, 20101, published in the Official Gazette of the Union (Diário Oficial da União) on February 10, 2010. It became effective on February 10, 2010.

Under this new rule, taxpayers who leave Brazil in a definitive manner or become nonresidents of Brazil, must now submit the Notice of Definitive Exit from the Country as well as the Final Income Tax Return regarding the Definitive Exit from the Country.

Individuals who leave Brazil in 2010 (and after February 10), must file the Final Income Tax Return after March 1, 2011, and no later than April 30, 2011; and the Notice of Definitive Exit must be filed on the actual date of departure from the country or, in the case of a departure of a temporary nature, between the date the individual becomes a nonresident, up to the last day of February of the subsequent calendar year.

If the taxpayers’ dependents – enrolled on the Individual Taxpayer's register (CPF) – leave Brazil’s national territory on the same date as the taxpayer, they should be included in the Notice of Definitive Exit filing. In cases where the dependents leave the country after the taxpayer’s departure, a separate Notice of Definitive Exit from the Country should be prepared for the dependents.

This Notice must be completed and submitted between the date of the definitive exit from the country up to the last day of February of the subsequent calendar year or, in the case of a departure of a temporary nature, between the date the taxpayer becomes a nonresident up to the last day of February of the subsequent calendar year.

Filing the Notice of Definitive Exit is a mandatory process, and it will trigger the issuance of a Receipt of Delivery of Notice of Definitive Exit from the Brazilian tax authorities (Recibo de entrega da Comunicação de Saída Definitiva do País), which will be immediately sent to the taxpayer. Only upon the issuance of the Receipt of Delivery of Notice of Definitive Exit will the taxpayer be able to continue with the process of leaving the country (e.g., file the Final Income Return).

Source: KPMG

U.K. and Residence Guidance (HMRC6)

On 23 February 2009, Her Majesty’s Revenue and Customs (HMRC), the U.K. tax authority, issued an update to HMRC6 “Residence, Domicile and the Remittance Basis.” The legislative changes that were made to the remittance basis rules in Finance Act 2009 have now been incorporated into “Section 5: ‘The remittance basis’”.

Specifically, the updated version includes further guidance on the foreign income exemption, the calculation of the £2,000 foreign income de minimis limit, and the foreign losses election. Further clarification on the implications for individuals choosing to be taxed on the remittance basis is also provided.

KPMG LLP (U.K.) Note

Although HMRC6 has been updated to reflect legislative changes made in Finance Act 2009, the remainder of the document has not been updated to reflect recent tax cases. HMRC has explained that it wants to consider and reflect on a recent judicial review of HMRC’s application of its guidance. This judicial review formed part of the appeal in the Gaines-Cooper case.3 That judgement confirmed the importance of the principle that HMRC should be required to abide by its published guidance.

It is anticipated that HMRC will publish a revised version of HMRC6 as soon as possible, as, in our view, the current version of the guidance does not fully reflect current case law.

Source: KPMG

Czech Republic-Japan Totalization Agreement in Practice

Under the social security agreement concluded between the Czech Republic and Japan, which came into effect on 1 June 2009, an employee is subject to the social insurance system (social security and health insurance) of the contracting country where the work is performed.

There is an exception to this basic rule: Japanese employees sent by their Japanese employers to work in the Czech Republic can remain subject to the Japanese social insurance system, but only for a maximum period of five years from the date they are sent to the Czech Republic.

A J/CZ 101 form issued by the Japanese social security administration is submitted to the relevant Czech social security administration office by the Japanese employee as proof that he or she remains subject to the Japanese social insurance system. If Japanese employees submit the form, the Czech employer will not pay contributions for them to the Czech social insurance system.

If an employee sent from Japan is a managing director of a Czech company, a member of the company statutory body, or the head of a branch recorded in the Czech Commercial Register, the Czech Social Security Administration will not permit such exceptions. It will argue that this is not a case of an employee being sent to a Czech company and therefore a contribution to the Czech social insurance system must be made from the remuneration paid by a Czech company/branch.

KPMG Note

According to information obtained from the Czech Social Security Administration1, the Japanese side, on the basis of the agreement, has applied for a group exemption for approximately 470 Japanese employees with J/CZ 101 forms, who work in the Czech Republic as statutory representatives of a limited liability company, heads of branches, or members of statutory bodies, based on a mandate agreement or employment contracts.

The Czech Social Security Administration and the Centre for International Reimbursement representing Czech health insurance companies have allegedly not reached an agreement. The final decision will now have to be taken by the Ministry of Labour and Social Affairs and the Ministry of Health. If the ministries grant the exception, the Japanese employees listed in the group request will not have to pay social and health insurance contributions to the Czech insurance system.

The Japanese side allegedly referred to the Czech Social Security Administration with a request for similar treatment in relation to Japanese employees sent to the Czech Republic in the future. That would mean that the general exemption from the Czech insurance system would apply, pursuant to article 10 of the Agreement, for Japanese employees working in the Czech Republic as managing directors, heads of branches, or members of statutory bodies.

Source: KPMG