Tax practitioners and taxpayers alike have long struggled to determine whether virtual currency, aka cryptocurrency, is reportable for purposes of FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).

Virtual currencies have several simultaneous properties that make them challenging for practitioners and regulatory bodies to classify.

The AICPA Virtual Currency Task Force reached out to Treasury’s Financial Crimes Enforcement Network (FinCEN) to help practitioners answer this question. FinCEN responded that regulations (31 C.F.R. §1010.350(c)) do not define virtual currency held in an offshore account as a type of reportable account. Therefore, virtual currency is not reportable on the FBAR, at least for now. This may change in the future, especially considering the influx of stable coins.

One aspect of the new regime that has been the subject of much debate is that, from 6 April, a tax charge will arise on gains on disposals by non-residents of interests in entities that themselves hold UK real estate. This so-called “indirect disposal” charge will only apply to disposals of interests in “property rich” entities. This will be the case if:

• at the time of disposal, at least 75% of the value of the interest (e.g. shares) sold is derived from UK land. This test is applied to the gross-asset value of the entity in question, using the market value of the assets at the time of disposal; and
• the non-resident making the disposal holds at least a 25% interest in the entity.

There will be a “trading” exemption so that (broadly) a disposal of an otherwise “property rich” entity by a non-resident will not be caught by the new tax charge if the UK land held by the entity is used in the course of a trade during the 12 months prior to the disposal, and immediately
after. This is likely to benefit hotels, care homes and retailers.

The Finance Act 2019 has greatly extended the territorial limits of UK tax where capital gains are concerned. Non-resident persons are now taxable not only on UK residential property gains, but also on UK commercial property gains. However, the most radical aspect of the FA 2019 is the introduction of new rules allowing non-resident persons to be taxed on gains realised on the disposal of assets that are not themselves UK land, but derive some or
all their value from UK land.

Non-residents have for some time had an advantage over UK residents when it comes to the taxation of UK commercial real estate, because unlike most other major jurisdictions the UK does not exercise its full taxing rights
as afforded by international tax rules.

The government now attempts to ‘level the playing field’.

From 6 April 2019, a single UK tax regime will apply to sales of both residential and commercial UK real estate by non-residents, comprising

1. a new UK tax charge for gains on “direct” sales of UK real estate; and
2. a new UK tax charge for gains on “indirect disposals” of UK “property rich” interests. This will bring within the scope of UK tax disposals by non-residents of certain companies, partnerships and unit trusts holding UK real estate.

The applicable rate of UK tax will be 19% (Falling to 17% from April 2020) for non-resident companies caught by the new rules and, for non-resident individuals and others, up to 20% (in the case of commercial property) and up to 28% (in the case of residential property).

The new tax charge(s) will in each case only apply to gains arising since 6 April 2019 (i.e. property held at that date will be rebased to its current market value).

HMRC want to better focus the Private Residence Relief (PRR) by ensuring that those gains or losses that arise when a person sells or otherwise disposes of a dwelling that has been used as that person’s only or main residence is kept outside of the realm of Capital Gains Tax. Since its
inception in 1965 it provided a protection that homeowners who legitimately occupied their properties will not be hit with a tax bill in the event they sell and move on to another property for whatever reason.

The proposed changes are as follows:

• Reducing the final period exemption from 18 months to 9 months;
• Restricting lettings relief to periods where the property owner is also in occupation;
• Adjusting the rules for giving PPR where the property has been transferred between spouses;
• Legislating for extra statutory concessions: D 21 (late claim for main residence) and D49 (delay in moving into a property); and
• Extending the PPR relief for job-related accommodation to military service personnel, where the accommodation is not owned by the MOD.

Lettings relief will no longer apply for periods where the whole house is let, which will hit “move and let” landlords.

These changes are all expected to come into effect for disposals made on and after 6 April 2020.

The Internal Revenue Service is having trouble dealing with the information it’s getting from foreign banks about U.S. taxpayer assets under the Foreign Account Tax Compliance Act because of problems with the data, various mismatches and missing or inaccurate Taxpayer Identification Numbers provided by the foreign banks. Furthermore, the IRS lacks access to consistent and complete data on foreign financial assets and other data reported in tax filings by U.S. individual taxpayers, partly because some IRS databases don’t store foreign asset data reported from paper filings. Another major problem for FATCA has been the hardships faced by U.S.-born expatriates. Some Americans living abroad can’t get services from foreign banks that find the law too burdensome.

The GAO made seven recommendations to the IRS and other agencies to enhance the IRS’s ability to leverage FATCA data to enforce compliance, address unnecessary reporting, and better collaborate to mitigate burdens on U.S. persons living abroad

Previously, in order to qualify for Entrepreneurs’ Relief, an individual must have held shares which represented five percent of the ordinary share capital which entitled them to five percent of the voting rights.

From 29 October 2018, the shares must also entitle the holder to five percent of the company’s distributable profits and five percent of the assets available to equity holders on a winding up.

The 2 key changes are:

• An extension of the qualifying holding period from one year to two years (introduced for disposals on or after 6 April 2019); and

• The claimant must have a five percent interest in both the distributable profits and the net assets of the company.

The extension of the qualifying holding period from one year to two years will mean that you need to consider your position at least two years in advance of any potential transaction to ensure the position is protected.

Since 2010, HMRC has raised an additional £2.9 billion through its focus on offshore non-compliance, giving HMRC increased powers to assess older liabilities, charge higher behavior-related penalties and to mount criminal prosecutions for the facilitation of tax evasion.

HMRC’s success has also been boosted by several information sharing agreements with off-shore jurisdictions and the Common Reporting Standard, a global information sharing project involving over 100 jurisdictions, initiated by the UK during its presidency of the G8 in 2013.

HMRC’s stated objectives have changed since the 2014 No Safe Havens document and is now to maximize revenues and bear down on avoidance and evasion, transform tax and payments for customers and design and deliver a professional, efficient and engaged organization.

They intend to achieve this through:

Leading internationally

• HMRC’s international focus is suggestive of a better grasp of the connections within the offshore tax environment. The UK is also a member of 2 new international partnerships, including the Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC), a network of 40 jurisdictions and Joint Chiefs of Global Tax Enforcement (known as ‘J5’). These organizations complement HMRC’s collaboration with other UK government law enforcement agencies, including the police, the National Crime Agency, and the Border Force, as well as regulators, such as the Financial Conduct Authority.

Assisting compliance

• HMRC has committed to invest £1.3 billion to become the most digitally advanced tax authority in the world, they have set out their intention to work with the tax profession and relevant professional bodies to improve the quality of compliance.

Responding appropriately

• HMRC has committed to using the full extent of its civil and criminal powers to investigate fraud and tackle financial crime.

The Global Intangible Low-Taxed Income (‘GILTI’) regime, enacted as part of Congress’s 2017 tax reform initiative, effectively subjects any US citizen, green card holder, and other US tax resident (a ‘US Person’) to US income tax on the worldwide earnings of any non-US corporation (i) in which the US Person himself or herself holds a material proportion of the shares, and (ii) which is majority-owned or controlled by one or more US Persons, each of whom owns a material proportion of such shares.

The GILTI tax applies only to ‘US Shareholders’ of ‘Controlled Foreign Corporations’ (‘CFCs’). A US Shareholder is a US Person, US corporation, or other US entity that owns or is treated as owning at least 10 percent of the stock of a non-US corporation by voting power or value.

Determining GILTI Tax Liability

Taxpayers with GILTI face U.S. taxation that would otherwise be applied at the new statutory corporate tax rate of 21 percent if corporates and ordinary federal rates if individuals. The law’s structure curtails the impact of this provision, however: Through 2025, taxpayers may claim a deduction equal to the amount of 50 percent of GILTI(not available to individuals although certain elections can be made to mitigate this), and 37.5 percent thereafter. Accordingly, taxpayers reporting GILTI income face effective U.S. tax rates on that income of 10.5 percent through 2025 and 13.125 percent thereafter. These deductions are limited under certain circumstances.

To the extent that GILTI is earned overseas, U.S. foreign subsidiaries may have paid foreign tax on that income. Consistent with other elements of the TCJA and prior tax law, taxpayers may claim credits against foreign taxes paid, but the TCJA limits foreign-tax credits (FTC) against GILTI income to 80 percent of taxes paid. This limitation has the effect of increasing the effective tax rate that firms face compared to if they could claim credits for all of their paid foreign taxes.

GILTI By Example

For the purposes of this example, assume the owner is a US individual and is the sole shareholder of an entity operating out of a foreign country that has a 10 percent tax rate. For this example, assume the foreign entity is essentially earning income ($100 in this example) with $100 intangible assets (essentially the office equipment). In this case, the excess over the 10 percent return on $100 in office equipment would equal the GILTI amount that the individual would need to report this on his/her tax return.

Hypothetical Firm’s GILTI Income

The individual would then report this income on his or her U.S. tax return. There is no 50 percent deduction unless a specific election is made for individuals. The income would be taxable at ordinary federal rates potentially 37%.

Therefore, as can be seen, by this example, this can be very onerous and careful planning is required to ensure over-burdensome tax liabilities are avoided.

The Chancellor’s 2019 Spring Statement gave the government the opportunity to consider the longer-term fiscal challenges ahead of Brexit, and initiate consultations on how these can be addressed.

Following this, we have put together a PDF which provides an overview of the updated forecasts for the UK economy and public finances, which we trust you will find useful

Spring Statement 2019