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Special Report: Tax Planning: Few Places to Hide as Taxes Trend Higher Worldwide

December 2, 2012 by Leave a Comment

Taxes on earnings, investment income, sales and a few other things have gone up already in many countries, and further increases are possible, including a huge one in the United States.

Another source of unease and doubt for taxpayers is a trend toward increases of other sorts: in scrutiny by revenue authorities, reporting requirements for individuals and businesses, and legislation to close tax code loopholes.

International taxpayers — expatriates and others whose personal or professional lives extend across borders — may find conditions particularly challenging. Dealing with a changing tax regime is tough; dealing with more than one even more so. Not only that, but some authorities are focusing more keenly on foreigners or on their own citizens living elsewhere. On the bright side, certain countries still treat foreigners better than their own citizens.

Navigating a landscape that may have been familiar but is suddenly a treacherous terra incognita is not easy, tax advisers warn, but it can be done as long as taxpayers are well prepared, take care to avoid mistakes and resign themselves not to go too far.

“There is no magic solution, no one structure that will work,” said Gavin Leckie, a wealth adviser and specialist in expatriate financial issues for J.P. Morgan Private Bank. “A lot of this is a defensive exercise. Make sure to organize yourself so that you’ve anticipated problems and taken steps to protect yourself.”

There is much, existing and potential, to protect yourself from. The biggest tax-related question mark — several hundred billion dollars big — concerns the fiscal cliff. That is the term coined by another famous Ben — Bernanke, the U.S. Federal Reserve chairman — to describe the anticipated destination of the American economy if an extensive mix of tax increases and government spending cuts goes ahead as scheduled next month.

Numerous increases are on the books or heading there in Europe, including on income and/or value-added taxes in Spain, Finland, Italy, the Netherlands and France, where a 75 percent income tax rate on income exceeding €1 million, or $1.28 million, is coming in 2013. Bucking the trend, Britain is about to lower its top income tax rate to 45 percent from 50 percent — after having raised it from 40 percent.

The European Commission has proposed, and 11 euro zone members support, a tax on financial transactions. Ireland introduced a tax on insurance premiums this year, the Dutch plan to raise their tax on premiums in 2013, and France hopes to raise taxes on rental income and capital gains from vacation homes of domestic or foreign owners.

If the expanding tax bite around the region makes you want to cry in your beer, being in France could cost you more on that score, too. The beer tax is due to rise 160 percent.

Conditions in Asia are comparatively placid, but that region has not been immune from the trend. Attempts to raise the value-added tax in Japan have failed in the past, along with governments that made them, but a doubling of the V.A.T., called the Japan Consumption Tax, was approved in August.

“Quite a few countries are trying to increase tax revenue,” said Kevin Cornelius, a partner in Geneva for the Human Capital Practice at Ernst Young. “The question is who’s raising taxes the slowest. I can’t remember as much tax legislation going through as we’ve seen in the last 24 months.”

Americans would welcome at least one more piece of legislation. At press time, negotiations were continuing in Congress on a compromise to avoid going over the fiscal cliff. The consensus among pundits in Washington and on Wall Street is that one will be reached that preserves present rates on middle-class taxpayers and perhaps raises them on high earners.

If no deal emerges, tax rates will increase on income, capital gains and dividends. Employee payroll taxes are also scheduled to rise, and surcharges are due to be introduced on earned income and investment income of well-off individuals to defray the costs of the health care overhaul.

Article source: http://www.nytimes.com/2012/12/03/business/global/03iht-srtaxlede03.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

You’re the Boss Blog: For Small Businesses, More Than Income Tax Rates Are at Stake in Deficit Talks

November 30, 2012 by Leave a Comment
The Agenda

How small-business issues are shaping politics and policy.

This summer, executives at Gray Construction, a closely held company in Lexington, Ky., decided it was time for a new telephone system. Gray, which builds factories and other industrial projects, has about 500 employees in offices in California, North Carolina, and Alabama, and executives concluded that a new Internet-based phone system would pay for itself in lower long-distance call costs in just five years, said Scott Parker, who is the company’s chief operating and financial officer and also an owner.

The only question was when to purchase the system. “We met with our tax advisers and they said that if we could have it up and running by the end of the year, it would be much better than waiting until next year,” Mr. Parker said. That’s because as a relatively small business, Gray Construction can take advantage of Section 179 of the tax code, which allows small companies to fully expense many capital investments in just one year, instead of over at least five years. Since the recession, Congress has allowed companies to expense more investment under Section 179, but the cap fell sharply in 2012, and is scheduled to fall sharply again in 2013, to just $25,000. “We’re able to write that phone system down faster by purchasing it in 2012 than if we purchased it in 2013,” Mr. Parker said. The phone system was up and running by early November.

This is not the only business decision Gray Construction made with an eye on the possibility of higher taxes in 2013. The company is structured so that its profits pass directly to its shareholders, who pay the taxes on that profit when they file their individual returns. Mr. Parker said the company sold $3 million of its stock investments in order for its owners to take their capital gains this year rather than next year, when the capital gains rate for wealthy taxpayers will rise by at least 3.8 percent, the result of a provision in the Affordable Care Act. (If the Bush-era tax cuts on wealthier Americans expire, their rates for capital gains will increase another 5 percent.) “In many, many cases, we will repurchase those same stocks, many almost immediately,” Mr. Parker said. “To us, it was sort of a no-brainer.”

As lawmakers and presidential advisers prepare to haggle over the so-called fiscal cliff, some small businesses are making their own plans. And while most of the discussion about taxes right now is focused on the expiring Bush-era tax cuts on wages and capital gains, as well as dividends and estates, a host of other deductions and credits that directly affect small businesses are on the line — and on the table.

•Section 179 Expensing: The depreciation provision that Gray Construction is taking advantage of this year is set to be trimmed from $139,000 in 2012 to $25,000 in 2013. In addition,the expensing of real estate purchases, made possible by 2010’s Small Business Jobs Act, will no longer be permitted. “At that level, it’s really too low to provide much bang for the buck to businesses in terms of being able to deduct expenses for purchases,” said Chris Whitcomb, tax counsel for the National Federation of Independent Business, the lobbying group. (For investments made in 2011, companies could immediately expense up to $500,000.) But Mr. Whitcomb notes that both the House and Senate support maintaining at least the current Section 179 expensing limit for 2013. “I’m optimistic that 179 will be at some higher level next year,” Mr. Whitcomb said.

Executives at Gray Construction weren’t willing to take that risk. “We chose the path of let’s deal with what we know, and let’s not speculate about what we don’t know,” Mr. Parker said. But for those willing to bet on having at least the same expensing limit in 2013, the decision on when to make an investment that would trigger the expensing rules hinges on how well the company anticipates it will do next year, said Grafton Willey, an accountant in Providence with the accounting firm CBIZ Tofias and a trustee of the National Small Business Association, another lobbying group. If next year looks to be as good or better than this year, take the expenses next year, said Mr. Willey, who believes that  limits for expensing will rise in 2013.

•Bonus Depreciation: Since 2008, companies have been able to take advantage of a special depreciation allowance that allows them to write off 50 percent (and sometimes more) of certain kinds of investment in the first year. The provision is especially helpful to companies too big to take advantage of Section 179 (which is only available to companies with total capital purchases under a certain threshold — $560,000 in 2012), but it is set to expire at the end of this year.

•The Research and Experimentation Tax Credit: The RD tax credit, as it’s also known, expired at the end of 2011. Economists debate the merits of providing an incentive for an activity that technology-driven businesses are likely to undertake anyway, but this so-called temporary credit has been extended 13 times.

•Built-in gains tax: Normally, when a company converts from a C corporation to an S corporation, it must retain its assets for at least 10 years or pay a 35-percent tax on the built-in capital gains that occurred before the company made the conversion. (The provision is intended to discourage a corporation from making the conversion simply to avoid double taxation — first at the corporate level, then at the shareholder level — on capital gains.) Since 2009, Congress has shortened the period, first to seven years for assets sold in 2009 and 2010, and then to five years for assets sold in 2011. Mr. Whitcomb, of the N.F.I.B., expects the more lenient built-in gains treatment will be revived for 2012 and 2013 as part of a last-minute deal.

•Temporary exclusion of 100 percent of gain on certain small-business stock: This provision, an incentive to invest in small companies by making the capital gains tax-free, is yet another creature of recent stimulus laws that has been expanded over the last few years, and like the others, it also expired at the end of last year. However, its fate is murkier. “It’s not a bad idea, just one that hasn’t generated a lot of consideration,” said Mr. Willey, the accountant.

•Work opportunity tax credits: These are tax credits for employers who hire military veterans or people belonging to certain disadvantaged groups (for example, people receiving government assistance or living in distressed areas). Tax credits for hiring the disadvantaged expired in 2011; the tax credits for hiring veterans expire at the end of this year.

•Fifteen-year depreciation for qualified improvements to leasehold, retail or restaurant property: We’re getting deeper in the weeds here, but without this provision, which expired in 2011, a renter, retailer, or restaurateur has to write off improvements over 39 years, longer than one might realistically expect to be in business (or renting at the same location).

•Enhanced charitable deduction for donating computer equipment: Still deeper in the weeds, this provision allowed C corporations the opportunity to donate computer equipment to schools and libraries and get a bigger deduction for it. The provision expired in 2011.

In addition, new tax rules and laws take effect in 2012 and 2013, among them several provisions of the Affordable Care Act (including the surtax on capital gains for the wealthy). Some people, particularly opponents of these new provisions, would like to see them on the negotiators’ agenda.

So which of these incentives will get a new lease on life? Mr. Willey said that apart perhaps from the Section 179 rules, all of them are in jeopardy, because the main fight is over the tax rates. “I don’t think we’ll know until New Year’s Eve,” he said.

Article source: http://boss.blogs.nytimes.com/2012/11/29/for-small-businesses-more-than-income-tax-rates-are-at-stake-in-deficit-talks/?partner=rss&emc=rss

Filed Under: Small Business Tagged With: , ,

Economix Blog: Romney’s Tax Bill, European Style

January 25, 2012 by Leave a Comment

5:46 p.m. | Updated to correct income figure for Liliane Bettencourt.

PARIS — Perhaps it’s no surprise that the Republican presidential candidates Mitt Romney and Newt Gingrich have been so vociferous in warning against what they deride as President Obama’s efforts to turn the United States, as Mr. Romney put it, ‘‘into a European-style welfare state and have government take from some to give to others.’’

Because one thing is for sure: if they lived in Europe, they’d be paying more taxes.

View From Europe

Dispatches on the economic landscape.

We spoke with tax experts in Germany, France and Britain about how much tax they would expect a citizen of their countries to pay on an income similar to Mr. Romney’s. The short answer is, millions more.

None of our tax advisers, all of whom deal with wealthy clients, wanted to be identified, and they cautioned that there was no way to give more than a ballpark estimate without studying Mr. Romney’s tax forms in more detail themselves.

But for the sake of a simple comparison, let’s start with France, which has a top income tax rate of 48 percent, and a capital gains tax rate of 19 percent. (All income is also subject to a 13.5 percent social security tax that helps to pay for things like pensions, unemployment insurance and health care; in the United States, by comparison, the top ordinary income rate is 35 percent and the capital gains rate is 15 percent. Only the relatively small Medicare tax is applied to all earned income, while in 2010 and 2011 Social Security tax applied to only the first $106,800 of wage and salary income.)

In Paris, the hypothetical M. Romney’s effective tax rate would probably have been in the neighborhood of 35 to 40 percent, including the social security tax. While much of his income derived from capital gains, his dividends, interest and income from his private-equity holdings would mostly be taxed at ordinary income rates. At 40 percent, his bill would have been about $8.6 million. (France also gives generous tax credits for large families, but M. Romney’s five children are all adults now, so that would not be of much use.)

In the United States, Mr. Romney paid $3 million in income taxes on his 2010 income of $21.6 million, for an effective rate of 13.9 percent. His Social Security and Medicare tax bills would have been trivial by comparison.

In Britain, income tax rates top out at 50 percent. But most likely, a top London tax lawyer told us, the effective rate would be significantly lower, since Mr. Romney’s income from capital gains would have been taxed at 18 percent to 28 percent.

So, he said, an educated guess would produce an effective tax rate for Mr. Romney of ‘‘probably 30s rather than 40s.’’ At 35 percent, the tax on Sir Mitt’s $21.6 million would add up to about $7.6 million.

In Germany, high-earning workers pay individual income tax rates of up to 45 percent, though our adviser — a lawyer in Frankfurt with a top international firm — noted that an additional ‘‘solidarity surcharge’’ is tacked on top of that for an effective top rate of 47 percent. Mr. Romney, however, would benefit from the lower rate applied to private capital investments: 25 percent, with the solidarity surcharge bringing it up to about 26.4 percent. With most, but not all, of his income treated as capital gains, Herr Romney would probably pay about 30 percent, or $6.5 million.

As for Mr. Gingrich, who paid 32 percent in federal income tax on his $3.14 million in income, he would face mostly ordinary income tax rates in Europe, so he would probably have to fork over about 40 percent of his income if he lived in one of the major European countries.

Of course, many wealthy people find ways to avoid the tax collector (legally and illegally), even in the dreaded European welfare states. Just ask officials in Greece and Italy.

In fact, Mr. Romney may even have competition: Liliane Bettencourt, heiress to the L’Oréal fortune and the richest person in France, made headlines last year with reports that she paid only about 4 percent in taxes on an income of nearly 250 million euros, or $324 million.

After the uproar, Ms. Bettencourt and some other members of the French wealthy elite took a page from Warren Buffett’s book, and asked the government to raise their taxes.

This post has been revised to reflect the following correction:

Correction: January 25, 2012

An earlier version of this post misstated Liliane Bettencourt’s reported annual income. It was in the hundreds of millions of euros, not hundreds of billions.

Article source: http://feeds.nytimes.com/click.phdo?i=8940c13c2558deebf294fc83d58d6252

Filed Under: Economy News Tagged With: , ,