Grayman Pinned By Taxman
At the moment, the grayman is a resident of a high-tax European country. The grayman has no U.S. tax exposure, since he pays more in taxes at home than he would pay in the United States. So he’s not doing this to save on the amounts paid for income tax revenues due. His business takes him back and forth from Europe to the United States and it would be exceedingly valuable for him to remain a US green card holder.
Here is the problem:
It is paperwork (e.g. “bureaucracy”)…. The cost and complexity of completing U.S. tax returns for American taxpayers abroad is painful, time-consuming and certainly not for the faint-of-heart.
Things that are tax-free in his current country of residence are not necessarily tax-free in the USA. He had an opportunity to enter into a startup business with some friends in Europe. Because he is a U.S. taxpayer, the tax compliance costs are monstrous. If they use a corporation, he has a Form 5471 problem. If they use a partnership, he is a U.S. taxpayer with an interest in a foreign partnership. He has FBAR and Form 8938 problems. The financial structure of the proposed startup was optimized for the European tax/fiscal landscape, but does not work for US tax purposes. If he has mutual funds, he has Form 8621 problems.
While the tax burden is minimal in the in the US because he pays so much income tax in the EU, it is still messy and adds complexity and cost to his U.S. tax return and related filings. There is a real annual compliance cost of dealing with CFC, PFIC, foreign tax credits and foreign earned income exclusions.
It is not that the grayman will owe any more taxes in the US – this is highly unlikely. But the compliance cost for working in multiple countries can be enormous and very costly.
While there are work-arounds for short term matter, longer term work requires coming into compliance and the cost of the professionals to assist him in this process.
Also – for another interesting comparison – take a look at the chart for the difference between military security and private security – once you figure in the total cost of deployment and benefits….
This Executive Protection article was written or edited by Barron James Shortt, the Executive Director of the IBA. http://www.ibabodyguards.com