1. The International Taxation Committee Technical Sessions Section 911 Exclusion
July 14, 2011
James Pickett
Tax Senior Manager Deloitte Tax LLP
Elyse Ganz
Tax Manager
Deloitte Tax LLP

2. Agenda Foreign Earned Income Exclusion
Foreign Tax Credit verses Exclusion
Totalization Agreement

3. Foreign Earned Income Exclusion

4. Sec. 911 - Exclusions Two exclusions: Foreign Earned Income Exclusion
Housing Exclusion
To be eligible, an individual must:
Have tax home in foreign country
Meet bona fide residence or physical presence test

5. Tax Home Definition Principal place of business or employment
If no principal place of business then regular place of abode
There are three factors for determining whether a taxpayer has established a foreign abode:
The taxpayer’s family accompanies him or her to live in the new home;
Living expenses are not being duplicated by maintaining an old home; AND
A majority of business contacts are now at the new location
Simon

6. Tax Home
If the individual satisfies all three factors, he is deemed to have a foreign abode, and thus a foreign tax home
If a person meets the tests for establishing a foreign tax home and maintains his or her principal dwelling abroad, merely retaining ownership of the former US residence will not cause him or her to have a US abode for purposes of this rule. The result is the same even if the individual’s spouse or dependents continue to reside in the US house
A final determination would depend on all other facts and circumstances

7. Qualification Tests
In order to be eligible to claim the foreign earned income and/or housing exclusion, the taxpayer must meet one of two tests:
Physical Presence Test (PPT)
Bona Fide Residence Test (BFR)
Once the taxpayer qualifies under BFR or PPT, he/she can potentially exclude some or all of his earnings from taxable income.
Simon — individual perspective (PPT/BFR covered on next slide, as is FTC)
US taxes citizens on ww income

8. Physical Presence Test (PPT)
U.S. citizen or resident must be physically present outside the U.S. for at least 330 full days in a rolling 365 day period.
Therefore, an individual can be physically present in the U.S. for 35 days during this rolling 12 month period.
May include period before or after departure from the U.S.
Tax home requirement need only be met with respect to the 330 qualifying days, not the entire 12 months.
Simon

9. Physical Presence Test (PPT)
Travel Days:
A full day in a foreign country is a period of 24 consecutive hours from midnight to midnight – Partial days do not count
Travel days directly to or from the U.S. count as U.S. days
Time spent in a foreign country and NOT over international waters will count toward the 330 days of presence outside the U.S.
Simon — cover individual issues, 6 month presumption of BTs etc
Payroll issues

10. Physical Presence Test (PPT)
Example 1
Individual Leaves the U.S. for France by air on June 10 and arrives in France at 9 am on June 11.
What is the first day outside of the U.S.?
Simon
business days

11. Physical Presence Test (PPT)
Example 2
Individual leaves the U.S. by 7pm on June 10 to travel to Amsterdam. The flight takes the individual over the international airspace of Canada at 11 pm on June 10, proceeds over the ocean and arrives in Amsterdam at 8am on June 11.
What is the first full day outside the U.S.?

12. Bona Fide Residence Test (BFR)
Must be a Foreign Resident for the entire CALENDAR year
Test applies to US citizens only
Exceptions
Resident alien from treaty country (nondiscrimination clause in the tax treaties)

13. Bona Fide Residence Test (BFR)
When is a taxpayer not a bona fide resident?
Taxpayer has earned income in a foreign country,
Taxpayer submits statement that he is not resident AND
Taxpayer not taxed on earned income by foreign country (as a resident)

14. Other Considerations Qualification Requirements Waived
Forced to leave due to Civil unrest, war or adverse conditions, and
Reasonable to assume that time requirement would have been met
Restricted Countries
Not considered bona fide resident of, or present in:
Cuba (Entire Year)

15. Foreign Earned Income Exclusion
Foreign Earned Income Eligible For Exclusion
The amounts which may be excluded are limited to the lesser of:
Foreign earned income OR
$92,900 (# of qualifying days/365 x 87,600) for 2011
Separate Exclusion Available For Each Spouse

16. Housing Exclusion Housing Cost Amount Qualified Housing Expenses Rent
Utilities
Real And Personal Property Insurance
Rental Of Furniture And Accessories
Residential Parking
Repairs
Certain Temporary Living Expenses

17. Housing Exclusion Costs Not Considered Housing Expenses
Lavish Or Extravagant Costs
Costs Of Purchasing A House
Improvements And Capital Expenditures
Purchase Of Furniture And Accessories
Domestic Labor
Payments Of Principal On A Mortgage
Depreciation
Interest Expenses And Taxes

18. Housing Exclusion Base Amount
For 2010, 16% of foreign earned income exclusion limitation, $27,450 Or $75.21 Per Day
Housing expenses are further limited to 30% of the taxpayer’s foreign earned income exclusion ($27,870), with the exception of specific countries/cities listed in Notice
Employer Provided Amount
Housing Exclusion Calculation

19. Housing Deduction
Housing Amount Not Provided By Employer Only Self-Employed May Claim Deduction

20. Calculation of Housing Exclusion
Gross Income
$200,000
Housing Cost
$92,000
Qualified housing expenses eligible for Exclusion
$27,450
LESS: Base housing amount
($14,640)
HOUSING EXCLUSION
$12,810

21. Foreign Earned Income Exclusion
Only Foreign Earned Income (FEI) Is Eligible
Upper limit for $92,900
Limited To FEI Less Housing Exclusion
Limited To Maximum Amount
Daily Proration
Years In Which The Qualifying Period Includes Only Part Of A Year
Not The Same As The Proration Formula Used To Source Earned Income

22. Foreign Earned Income Exclusion
Income excluded as either foreign earned income or as part of the housing cost exclusion is included for the purposes of determining the marginal tax rates applicable to non-excluded income.
“Exclusions” will be added back for purposes of determining the marginal tax rates applicable to all income
Income will be taxed at the same marginal tax rate as it would have been taxed without the exclusion
Employees with taxable income from foreign sources will be able to use the available foreign tax credits to reduce or eliminate the additional tax

23. Income Tax Calculation – Combined Exclusion Example
Single individual on assignment for all of 2011, earning $200,000 and has qualified foreign housing costs of $40,000. For purposes of this calculation, please assume the individual is not living in a high tax cost country.
Taxable Income before exclusion $200,000
§911 Exclusion ($105,710)
($92,900 + $12,810)
Taxable Income $94,290
Income Tax on $200,000 $51,117
Less: Tax on §911 Exclusion ($23,308)
Total Net Income Tax $27,809
Effective Tax Rate 13,90%

24. Maximizing the General Exclusion
BFR / PPT Comparison In:
Year Of Arrival
Year Of Departure
Use Of The “Slide Rule”
Consider Factor In The Foreign Country – Goal Is Lowest Overall World-wide Taxation
Separate Exclusion For Husband And Wife

25. Maximizing the General Exclusion
Physical Presence Test
Calculation of 330 days and 12 month rolling period
Year of Expatriation
Begin with the first full foreign day on assignment and count forward
Any days spent in the U.S. and ONLY THE U.S. must be excluded
Generally, foreign days prior to assignment (i.e. business trips) do not count towards the 330 days.
Once the 330th foreign day has been reached, look back one full year (365 days earlier) to determine the beginning of the “qualifying period”
This is known as the slide rule method since the taxpayer can “slide back” up to 35 days if he/she did not spend any time in the U.S. during the 365 day

26. Maximizing the General Exclusion
Example:
John and his family arrived in the UK on March 1, 2010 and returned to the US on a business trip from May 10 – May He worked 8 days during this trip.
When does John’s PPT qualifying period begin?
What amount may John exclude in 2010?

27. Maximizing the General Exclusion
Example (Continued…)
PHYSICAL PRESENCE:
3/1/ /31/10 2/4/11 12/31/11
330 FULL DAYS OUTSIDE U.S.
| |
2/5/10
1 YEAR
| |
330 FULL FOREIGN DAYS: 3/2/10 to 2/4/11
QUALIFYING PERIOD BEGINS: 2/5/07
2011 EXCLUSION: 331/366 x $92,900 = $84,016 (app.)

28. Maximizing the General Exclusion
Calculation of 330 days and 12 month period
Year of Repatriation
Begin with the last full day of assignment and count backwards
Once the 330th day has been reached, look forward one full year to determine the end of the qualifying period. This often extends the PPT period beyond the repatriation date.
U.S. days must be excluded
Foreign days after the assignment generally do not count towards the 330 days

29. Combining the analysis – should one always claim both the exclusion and the credit or considering forgoing the exclusion?

30. Forgoing the exclusions?
Why the exclusion may not benefit everyone
No adjustments made to foreign tax credit reduction fraction
New stacking rules require use of higher marginal tax rates for determining overall tax liability
By not claiming the exclusion, taxpayers will not be subject to the reduction of foreign taxes and may receive a more significant benefit of the foreign tax credit

31. Example Scenario (2010)
Single, $250,000 Gross Income, $50,000 Housing Costs, 25% Effective Foreign Tax Rate
With Exclusion Without Exclusion
Gross Income $250,000 $250,000
Exclusions:
FEIE ($91,500) $0
Housing ($12,810) $0
Deductions/ Exemptions ($9,350) ($9,350)
Taxable Income $136, $240,650
Tax Before FTC $41, $64,531

32. Example Scenario (Cont.)
With Exclusion Without Exclusion Tax Before FTC $41,615 $64,531 Foreign Tax Credit: Foreign Tax Paid $62,500 $62,500 Foreign Tax Reduction ($26,078) $ 0 Net Foreign Tax Credit $36,422 $62,500 Net Tax: $5,193 $ 2,031 Tax lower without exclusion by $3,162

33. Forgoing the exclusions?
Process for evaluating whether exclusion should be claimed
With and without tax calculation for current year
Measure impact on foreign tax credit carryover
Understand implications for future year returns

34. Revoking/Re-electing the exclusions
Understand Implications for Future Year Returns
Restrictions on changing between exclusion and foreign tax credit
If exclusion claimed in prior year, possible revocation of exclusion if not claimed in current year
If revoked, exclusion cannot be claimed for 5 years
Must consider potential future move to different country

35. Revoking/Re-electing the exclusions
How Is Revocation Completed?
Filing a statement that the individual is revoking one or more of the previously made elections (Reg. § (b)(1)).
Claiming FTC in subsequent year when otherwise qualified for exclusion (Rev. Rul ).
What about first year on assignment?

36. Revoking/Re-electing the exclusions
How do you Re-elect?
Only through private letter ruling request
Criteria:
Period of U.S residence
Move from one foreign country to another with differing tax rates
Substantial change in the tax laws of the foreign country of residence
Change of employer

37. Totalization Agreement
Totalization Agreement — social security agreement between 2 countries
Individual/company continue to pay into the home country social system and are exempt from host country system.
Allows mobility between countries without “break” in coverage. Each agreement is unique with regards to requirements/coverage.
For “temporary” assignments — usually less than 5 years.
Employers of US based assignees apply for “Certificate of Coverage” from US Social Security office and provide to host country payroll. Can apply via mail, fax or online.

38. Totalization Agreement

39. Payroll matters (cont.)
U.S. currently has Totalization Agreements with 24 countries:
Japan
Australia
United Kingdom
Spain
France
Germany
Switzerland
Belgium
Italy
Norway
Chile
Czech Republic
Canada
Sweden
Portugal
Netherlands
Austria
Finland
Ireland
Luxembourg
Greece
Poland
South Korea
Denmark

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