Here is the flyer. SBT1152-STEP-Arabia-Conference-Announcement-FINAL-PRINT.pdf

From a correspondent by email today:

Just a quick update.  I called the FBAR 1-800 number to check if my delinquent FBARs for 2005-2009 that I sent in October had been received.  The lady informed me that they are not in the system as they have probably not yet been processed.  She said they had millions of documents and they were still processing July.

This tells me that if you are a normal person with unfiled FBARs, now is the time to dump them into the system.  Your delinquent filings will be compared against the cohort of other filings entering into the system.  In your favor you have IRS overload and you have a very large bell curve distribution of taxpayers.

The hard decision is to guess how you look compared to the expected pool of filers.  Among those “millions of documents” what will yours look like?  You hope that the IRS behaves like Foghorn J. Leghorn.  The person who opens your envelope merely glances at your FBARs, and snaps “Go, I say, go away, boy.  Ya bother me.” (Sound file)

That decision is where you need to talk to someone smart and experienced.

Obligatory

This is not legal advice to you.  You’d be a damn fool to make important legal decisions with serious consequences just because you read a blog post by some yutz (that would be me) on the inter webs.  Especially a yutz who likes to watch cartoons with his kids.

My pockets contain

I carry the following:

• iPhone from ATT (data turned off while traveling; never use it for voice; who wants another $1,400 bill?). It is only here because some people have the number and because it has the centralized calendar for the firm.
• BlackBerry with a Dubai number (all my data needs solved for AED 99, even while roaming in Saudi Arabia).
• Candybar Nokia that Bobby gave me in Jakarta (thanks Bobby) that holds a Saudi SIM card for local use while in Riyadh.
• Plus a free-floating T-Mobile USA SIM that I need to stick into a phone periodically to check for voice mails.

Four numbers, three phones.

I am actually a normal person here in the Middle East and Asia. Pretty much everyone I have seen has two phones on them (iPhone plus something else is normal, and that “something else” is a Blackberry as often as not). Sit down at a table, plonk down your mobiles. At home, however, the multiple phone thing drives my wife bonkers.

At home I also have the super secret Batphone on Verizon which sadly doesn’t travel outside the USA.

Problems I have solved

I have solved the problem of inSANE voice and data roaming rates on my ATT and T-Mobile USA phones by buying prepaid SIM cards everywhere I go. Cheap.

I think I spent AED 200 (a little more than $60) with Etisalat in Dubai and got more minutes and text messages and data service than I need. I spent probably SAR 150 on prepaid SIM plus recharge cards on Mobily here in Riyadh (maybe $45).

Except for inbound calls and checking voice mails, I’m not going to see the $1,000+ cell phone bills I have experienced in the past. It is worth carrying around a few extra phones to save that kind of money.

Problems I will solve soon

The “too many phones” problem will be solved later today. I’m going to get a dual SIM clunky phone. That eliminates one phone in my pocket.

The expensive mobile data problem ($20/MB? GDIAF T-Mobile and ATT) remains. Buying a month of data service on a prepaid SIM card is trivially easy (just send an SMS and you’re in business) and it’s cheap. I’m going to buy an unlocked iPhone from Apple which I can then use at home and abroad. All of the business apps on my iPhone will then work well, via the local data plan instead of the loco U.S. carrier data roaming.

Any other suggestions?

If anyone out there has suggestions on how to better manage international mobile phone costs, please let me know.

Coffee, taxi, meeting, taxi, coffee. Repeat. Did I remember to eat? Why do I have so many phones in my pocket?

Now

Sunday in Riyadh. One taxi ride to the Sulaymaniyah District, meeting, return. Coffee at the Starbucks on Tamimi Street behind my hotel, next to the Al Khozama Hotel. Repeat two more times today.

Then

I’m back at the Faisaliah after the second meeting of the day. Ran into Moyed in the lobby. Upstairs to my room with the 5kg of dates (!) that I hope I can get through customs in Los Angeles.

And then

Coffee, water, get ready for taxi, meeting, taxi. You’d think Riyadh is a big city but no. People I know also know people I know. If you get what I mean. It’s strange.

Here is the view from Room 243 of the Al Faisaliah Hotel. In the far distance, barely visible is Kingdom Tower, home of the Four Seasons Hotel, where I have stayed on previous trips. That is the silver building with the necklace-shaped hole in it. Or a downward-facing D. Whatever. There is a mosque near to me (on the right of the picture) and of course there are buildings under construction everywhere.

Snowman in Riyadh

And a view down to the ground. This little friend is a gift from my youngest child. She made it in First Grade, I think. I take her little snowman on almost every trip I make. There are actually two coffee shops, side-by-side, on the street. There is a Starbucks on Tamimi Street right behind me.

Coffee is essential.

Yes, I do in fact have a small balcony.

Jell-O Shot Number 015 – The On The Road Again Edition

TL;DR

Headed to Dubai and Riyadh. Topics: real estate and expatriation. People vote with their feet and their wallets.

Now

After a long absence, the Jell-O Shot returns. Mostly I write this while sitting in an airport somewhere, usually jet lagged. I haven’t been on a long flight since last May. This email is your clue that travel is kicking back in gear.

I’m headed for Dubai, then Riyadh. This is a normal loop for me. The two things on the agenda for meetings?

• real estate investments; and
• expatriation.

Real Estate

For most people, the concept of nonresidents buying U.S. real estate will generate a yawn. Dog bites man. Film at 11. The market is down, the dollar is cheap. What’s not to like? (FWIW I see purchases of single family homes for personal use as well as traditional commercial/investment property purchases). My job there is to make it happen. And keep the taxes low, as much as possible at least.

People are voting with their wallets.

Expatriation

But expatriation? Yes. Our office is doing a startlingly large volume of business in helping people terminate their U.S. citizenship or green cards.

People are voting with their feet.

The process is complex — not only do you log out of the citizenship/residence system, but you also have to log out of the U.S. tax system properly. That can get expensive. The IRS behaves somewhat like a lover scorned, wanting to land one last kick in your derriere as you’re walking out the door.

When I go to the Middle East (and I go a lot) people grumble about U.S. foreign policy. But people don’t terminate their U.S. citizenship for that reason, in my experience. They cite U.S. tax policies.

Reflexively you think, aha! They don’t want to pay income tax. Well, not exactly. Our best salesman is IRS Commission Shulman and his holy war on U.S. taxpayers who have foreign bank accounts. Bluntly, it is the prospect of facing dozens of required tax forms — sometimes obscure — with monster penalties if you screw things up. This has been the pattern since 2008 when the IRS started gearing up to pursue offshore bank accounts held by U.S. persons.

Living a normal life and unintentionally subjecting yourself to gigantic (as in hundreds of thousands of dollars) penalties for a paperwork foot fault strikes most people as unfair.

The second tax reason given is the estate tax. For multinational families with assets abroad, with some family members U.S. citizens and some not, the U.S. estate tax can eviscerate the family firm, or the family real estate holdings. If the wealth was created outside the U.S. with significant non-U.S. inputs (human or capital) it strikes many as unfair to sacrifice 35% to the United States Treasury.

The U.S. passport is too expensive. What you get for what you pay is out of balance.
That’s why people give up citizenship and permanent resident status.
And the people who are doing this are precisely the people you’d want as productive, contributing members of the U.S. society.

End of rant.

LAX w00t!

I’m sitting in the barn that passes for a terminal at LAX, ready to board the bus to take me to the Emirates nonstop to Dubai. I’m looking forward to re-connecting with friends there. More later.

And you can always unsubscribe if you want. There’s a little hyperlink buried in this email that will let you do that instantly.

Phil.

(Available on +1-626-999-4000 while abroad — my T-Mobile cell phone).
As always, call/email. I’d love to hear from you.

• expatriation (as in giving up U.S. citizenship); and
• cleaning up paperwork problems for undisclosed bank accounts.

Offshore Bank Account Cases

I have done a LOT of work in the “clean up the undisclosed bank account” arena. I commend to you an article published today, titled “The OVDI Drudgery for Minnows.” What the author says is 100% true. This is from a tax practitioner (that would be me) who has handled many, many dozens of cases with the IRS and has advised an undisclosed but much, much larger number of people to find alternate ways to handle their affairs. I am very expensive. I suspect other tax lawyers experienced in this arena are also very expensive. Part of the expense is due to the difficult work, but his point about drudgery — endless hours grinding through the paperwork — is also spot-on.

FWIW I now only take on offshore disclosure cases with EXTREME reluctance. The absolute poop (this is an item of technical tax jargon and is somewhere in the Internal Revenue Code, I just can’t put my finger on it right now) the IRS put my clients through has utterly soured me on the experience. It chewed up Life Credit Units for me as the lawyer, as surely as it chewed up Life Credit Units for the clients.

My suggestion to those of you out there in the real world — first, get experienced, competent advice to decide whether you have a money problem or a jail problem with the IRS. It is well worth over-paying for that kind of advice.

After that, if you don’t have a jail problem I would be extremely reluctant to consign myself to oblivion as defined by the IRS’s now semi-permanent voluntary disclosure program. I am writing this blog post from the Al Faisaliah Hotel in Riyadh. U.S. persons living abroad almost cannot help but screw up one obscure IRS paperwork problem or another and thus risk massive penalties. But give the IRS 27.5%? NFW.

I must say that many OVDI cases that have opted out are being dealt with sanely. Some not.

I don’t want anymore of these cases. I know people. Call me and I will refer you to them.

In the meantime, read The Isaac Brock Society to get some education.

Expatriation

The reason I am in the Middle East is to talk to people about canceling their U.S. citizenship. Massive, massive interest in this.

Again, The Isaac Brock Society website is extremely useful. I especially like the first-hand reports of the exit interviews at different Consulates. This will really help you to know what to expect when you show up at an Embassy or Consulate to renounce citizenship.

Logging out of the citizenship/permanent resident status is the easier part. The tax part is more complex. For most of the authors who tell their stories on www.isaacbrocksociety.com I suspect they don’t have complex tax issues to solve when they expatriate. Our office more often than not lives squarely in “complexity” land.

Anyway

I’m out of here. Headed up the road to see a friend who’s office is across from the Jarir Bookstore on Olaya Road here in Riyadh. I’m back in the office next week.

Carry on.

Hello to “Just Me” and Petros of The Isaac Brock Society.

Back to tax policy and unintended consequences.  This stuff is right up my alley because this type of tax planning is What We Do here at the Hodgen Law Group Tax Ranch & Rocket Factory.

Put this blog post under the heading of “Unintended Consequences of International Tax Policy.”

Apple Inc. has a reported $82 billion of cash.  That sounds like Apple could buy anything, do anything.  It could even spend that money in the United States and (God forbid) create jobs for people.

The author of the Seeking Alpha blog post has read Apple’s financial statements and points out the obvious.  A large chunk of that cash — $54 billion, to be precise — is sitting outside the United States and will not return to the United States.

Here’s why.  Blame Congress for this.

How Multinational Corporations Pay Income Tax

The default tax treatment for U.S. taxpayers — corporations included — is “All of your income, earned worldwide, is taxed in the year you earn it.”  Whether Apple sells an iPhone in China or in Chicago, the profit it earns will be subjected to U.S. income tax in the year that iPhone was sold.

For U.S. corporations doing business outside the United States, however, we can alter the default tax treatment.  If the U.S. corporation configures its business operations correctly, a dollar of profit earned outside the United States will only be taxed by the United States when that dollar of profit is brought back to the United States.  Earn a dollar of profit abroad and don’t bring it home?  No U.S. income tax.  Earn a dollar of profit abroad and bring it home?  U.S. income tax.

Call this a “deferral strategy.”  The U.S. corporation is not exempt from U.S. income tax on its foreign profits.  It is just postponing the day that it has to pay tax on those foreign profits to the Internal Revenue Service.

A corporation that follows the deferral strategy ends up with two buckets of income — the U.S. domestic income, which is fully subject to tax, and the foreign income, on which U.S. income tax is deferred until the corporation chooses to bring the income back to the mothership in the United States.

That’s the picture that Seeking Alpha points out for Apple Inc.  It has two buckets of cash:

• $28 billion of cash it generated from selling stuff in the United States, on which U.S. income tax has presumably been paid; and
• $54 billion of cash it generated from selling stuff outside the United States, on which foreign income tax has (probably) been paid but U.S. income tax has not (yet) been paid.

Why Tax Deferral is Good

Why would U.S. corporations do such a thing?  The short answer is to blurt out the words “present value” and your nimble brain can connect the dots.

The better way to explain this is with an example.

Pretend that Apple has a subsidiary corporation in China.  They sell iPhones in China and generate $1,000,000 of profit.

• Scenario Number 1.  If they bring the $1,000,000 back to the United States, that $1,000,000 of income on Apple’s income tax return will be taxed (let’s pretend) at 35%, leaving Apple with $650,000 in after-tax cash.  Apple now has $650,000 in the bank.  It is going to use that money to build more iPhones to sell.  Pretend that each iPhone costs $130 to build–that is Apple’s cost to manufacture an iPhone.  (I’m making up numbers here, folks.  They’re all fakey-fake for the purpose of this example.)  That means Apple can build 5,000 iPhones to sell using the profits it generated from the first batch of iPhones it sold.
• Scenario Number 2.  If Apple Inc. leaves the money outside the United States, the IRS does not take 35%.  That means Apple has $1,000,000 in the bank to use to build more iPhones to sell.  At $130/unit for cost of manufacture, Apple can build (Phil runs to his calculator . . . let’s see . . . $1,000,000 divided by $130 = . . . ) 7,692 iPhones.

If you can build more iPhones, you can sell more iPhones.  If you can sell more iPhones, you can make more profit.  So we like Scenario Number 2.

Tax Deferral Drives Business Expansion

If you’re going to pick Scenario Number 2 and the deferral strategy, you can’t bring your foreign profits back to the United States.  If the foreign profits are transferred to back to the Mothership in Cupertino, they get taxed.

What happens is that a multinational corporation starts to accumulate cash.  Self-evidently you can accumulate more cash quicker if you’re not paying tax than if you are.  So cash in the bank grows faster outside the United States than inside the United States.

The multinational corporation uses that cash as working capital.  Since it has more working capital outside the United States, it has more fuel to generate sales growth which can only occur outside the United States.  The multinational corporation has an incentive to focus on foreign markets because its return on investment is higher.  Over time, this leads to faster growth outside the United States and the U.S. market becomes a smaller and smaller slice of the multinational corporation’s overall sales.

That’s tax policy at work.  U.S. tax policy makes it expensive for a U.S. corporation to repatriate its earnings.  That means that it has less working capital in the United States.  That, in turn, means it can’t spend as much money in the United States to generate more sales, grow its business, hire people, etc.

There’s another self-evident point.  There are more people outside the United States than there are inside the United States.

So from Apple’s perspective, they have a LOT of working capital outside the United States and a LOT of potential customers outside the United States.  Hmmm.  I wonder what is going through Tim Cook’s mind.

Now do you start to see why there are so many articles about China quickly becoming Apple’s biggest market?  It’s not just that there are so many people there who want iPhones.  It is because Apple has a big bucket of cash that they must reinvest to fuel further expansion outside the United States.  Apple must plow its foreign profits back into making more products to sell outside the United States.

Tax Repatriation Holidays and Some History

Periodically Congress wakes up and sees the problem.  Laws are proposed to provide a temporary tax loophole for U.S. corporations to bring their foreign profits back to the United States.  Here’s recent example.

That’s dumb.

The better solution would be a wholesale re-architecture of the Internal Revenue Code.  That’s a topic for another blog post sometime.

I would just point out, however, that the current Internal Revenue Code we have has its intellectual underpinnings in brains that hearken back to the Civil War.  Our current version of the Internal Revenue Code is the 1986 Code.  It is largely a creature of the Internal Revenue Code of 1954.  The Chairman of the House Ways & Means Committee from 1933 until 1953 (except for a two year stretch) was Robert L. Doughton.  He was born in 1863 and his father was a Captain in the Confederate Army.

Imagine what international commerce looked like to someone born in 1863.  When Robert Doughton was working on tax laws in the 1930s, 1940s, and 1950s, all of which culminated in the 1954 Code, what did his world look like?  His childhood knew of steam ships.  The telegraph.  Horses as transportation.  From brains like these grew our current international tax rules.

Another major slice of the U.S. international tax law came into place in 1960.  What was the world like then?  People in Congress in 1960 would have been born in the early (20th) Century.  What biases and understanding did they bring to the table about America’s place in international commerce?

Life moves fast.  You Don’t Live in the World You Were Born Into.  But to a surprisingly large extent, Apple Inc.’s current business strategies are driven by tax policies from the brain of a man born in 1863 to a Confederate Army veteran.  Funny, that.

Credit where credit is due.  Brian Dooley is the one who first introduced me into the history lesson I have described here.  He does it far more eloquently than I do.

I will have my U.S. mobile phones with me while I am in the Middle East. Well, not the useless Verizon CDMA one. The ATT and T-Mobile phones. The best way to get me is text me. +1-626-999-4000.