International Tax Planning, Reporting and Compliance for Individuals
International Tax Planning, Reporting and Compliance for Individuals
Nonresident individuals who move to Italy or the U.S. for a limited period of time or permanently are exposed to the risk of being subject to tax in Italy or the U.S. The actual tax treatment they are subject to eventually depends on how much time they spend in Italy or the U.S. in one or more tax years; what kind of work or activities they perform there, and what kind of income from source located in those countries they may earn. Similarly, they are subject to various reporting and compliance obligations. We assist clients dealing with the tax issues that arise in connection with their moving to or spending periods time in Italy or the U.S. and properly plan their move and change in tax residency in advance to minimize adverse tax consequences. On the other side, we also advise Italian and U.S. residents who move to a foreign country and are exposed to similar issues while still being subject to tax in Italy or the U.S.
Also, individuals residing in Italy or the United States having financial interests or even just signatory powers on investments or accounts outside of Italy or the United States are subject to significant reporting and compliance obligations. In Italy, Italian residents with assets, accounts or investments abroad must report them on a special section of their individual income tax return (Section RW), together with any transfer into or outside Italy or abroad concerning those assets, accounts and investments. Failing to file report is heavily sanctioned.
Similarly, U.S. citizens (living in the U.S. or abroad) and residents must report their foreign financial accounts by filing a special form (Foreign Bank Account Report) separately from and in addition to their individual income tax return. Also, starting with tax year 2011, they will have to file an additional report under the new FATCA legislation.
We assist our clients to comply with the above set of rules or comeback in compliance by filing delinquent returns and trying to avoid or minimize penalties.
Financing and Financial Products
Cross-Border Financing and Financial Products
Multinational enterprises engaged in cross-border financing transactions now face various types of earnings stripping and anti thin-capitalization or avoidance rules adopted in most countries around the world, and must properly deal with them in order to avoid undesired tax consequences.
Italy has enacted its own version of anti thin-capitalization rules in 2004, which were repealed and replaced with a new limitation on deduction of interest in 2008.
Financial products, designed correctly, provide competitive returns to purchasers and, on the issuer side, they aid in risk management and collection of funds for corporate growth and development. In the international setting, their value is enhanced through the use of hybrid entities and hybrid transactions (which means, entities and transactions characterized differently for domestic and foreign tax law purposes), with increased possibilities of double dips and tax efficient structures. A completely new set of rules on tax characterization and treatment of financial products was also enacted in Italy in 2004. With the growth in this area has also come more intense scrutiny at the legislative and administrative level, with the enactment and enforcement of anti-abuse and tax shelter rules, thus making it even more important that a financial product or transaction is carefully designed from the outset.
We advise clients in evaluating financial products offered by others, designing financial products and correctly structure their cross-border financing deals to maximize tax benefits and avoid risks of non compliance, unfavorable tax audit and assessments. Our services in this area include:
- evaluating existing financial products;
- assisting in structuring financial products or cross-border financing deals in a tax efficient manner;
- preparing relevant transactional documents;
- preparing and filing documents to organize appropriate issuing entities;
- advising on regulatory and corporate law requirements connected with issuance of financial products;
- advising on the applicability of anti-avoidance and tax shelter provision
Competent Authority Cases
Handling Competent Authority Cases
If you are faced with the prospect of international double taxation as a result of the fact that a country is imposing a tax in a manner that is inconsistent with an income tax treaty, you can resort to the competent authority process to avoid or at least minimize such international double taxation and obtain other forms of assistance in the international context. The competent authority process is designed to assure the proper application of a tax treaty to the benefit of taxpayer and is crucial for the proper working of the tax treaties system. Unfortunately, many taxpayers are not familiar with the competent authority mechanism and fail to obtain all the benefits it can provide. We can assist you to avail of the competent authority process to its full extent. Our services in this area include:
- studying the best strategy for obtaining the requested relief;
- preparing written Competent Authority request for relief tailored to your situation and in accordance with the formal and informal requirements of the Competent Authority of the relevant country;
- meeting with the appropriate Italian and/or foreign government personnel to promote timely and favorable action on the Competent Authority request;
- drafting proposed Competent Authority ruling or agreement.
Pricing Arrangements
Negotiating Advance Pricing Arrangements
In the United States, the Advance Pricing Agreement (APA) program was established in 1991 and is generally recognized as a mature and stable program that has provided taxpayers with an extremely valuable, non adversarial alternative to resolve transfer pricing disputes. Following the United States, other countries adopted and now have well established APA programs, including Australia, Belgium, Canada, Colombia, France, Germany, Japan, Korea, Mexico, the Netherlands, New Zealand, the United Kingdom and several others. In 1996, the OECD issued Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and included a chapter on APAs. More recently, the Pacific Association of Tax Administrators (PATA) (whose members include Australia, Canada, Japan and the United States) issued guidance on bilateral APAs. Italy has finally joined this group of countries by adopting in 2004 its version of APA program named “international tax ruling”, which extends to transfer prices, tax treatment of cross border interest, dividends and royalties, attribution of profits to a PE and other transfers of values to or from foreign persons and issued specific guidance on the procedure leading to the agreement with the tax administration.
If you are evaluating how or whether to seek an APA in Italy or abroad, we can help you:
- determine the most appropriate and advantageous APA transfer pricing methodology for your situation;
- prepare the APA application, including gathering the historical and financial information necessary for the APA analysis;
- engage an economist, if necessary, and oversee preparation of economic analysis;
- negotiate the terms of the APA with the tax administration;
- negotiate renewals or amendments of APA for future years.
Tax Treaties
Interpretation and Application of Tax Treaties
Countries enter into bilateral income tax treaty to govern the allocation of respective taxing rights and avoid double taxation of their residents with respect to income arising in their own territories.
A bilateral income tax treaty typically limits the source state’s power to tax income earned by a resident of the other contracting state from sources within its territory, provides for relief from double taxation and provides for a procedure before the competent authority of the contracting state as a way to settle international tax disputes arising under the treaty.
Tax treaty benefits essentially reduce withholding taxes at source on investment income and limit taxation of business profits at source unless attributable to a permanent establishment in the source country. The large Italian and U.S. tax treaty network makes it likely that you are entitled to benefits under one or more of the 70-plus Italian and U.S. tax treaties. Understanding and working with tax treaties require specific practice, because notwithstanding efforts to conform to a model (either the OECD or the U.S. model), Italian and U.S. treaties differ from each other in important and often subtle respects. Seemingly simple questions common to all treaties, such as who is entitled to treaty benefits, can give rise to contentious and potentially costly disputes.
Certain issues, such as what constitutes a permanent establishment and how profits attributable to a permanent establishment are computed (which seemed reasonably settled at a certain point in time) are still subject to debate and at the root of complex tax disputes. You are probably aware that since 1998 the OECD has been engaged in a project to re-examine the attribution of profits to a PE under article 7 of the OECD Model, and in August 2004 it issued a discussion draft on this issue, setting forth the methodology to attribute profits to a permanent establishment and addressing a series of related issues, which are receiving high attention among the OECD member states.
Our international tax practice covers both substantive legal issues and administrative and procedural aspects of securing treaty benefits by filing appropriate forms and working with Italian, U.S. and foreign tax authorities. Our services in this area include:
- advising clients as to eligibility to treaty benefits;
- structuring clients’ operations to maximize the value of treaty benefits;
- advising clients on treaty interpretation and applicability of a treaty to their transactions;
- assisting clients so that they satisfy any filing information or reporting requirements necessary to take advantage of treaty benefits;
- invoking the Competent Authority procedure under a treaty.
