Tax Tip: Manny Pacquiao’s Tax Problems Illustrate Need for Disclosure of Tax Treaty Benefits
According to multiple reports, Manny Pacquiao is currently in a battle with Filipino Tax Authorities regarding his taxes. The boxer claims that under provisions of a tax treaty with the United States, because he properly paid taxes to the IRS he was not subject to double taxation in his home country. However, the Filipino Bureau of Internal Revenue has taken the position that even if this were true, Pacquiao has not properly disclosed this information. The case is now making its way through the court system, as it appears Pacquiao and his attorneys would rather fight it out in court than work with the Bureau of Internal Revenue.
This situation is also illustrative of similar requirements in the United States. A taxpayer cannot always rely on a treaty provision which lowers the tax rate or excepts the taxpayer from filing a return without properly disclosing this position to the IRS. Furthermore, other tax benefits to limit double taxation by a foreign country, such as the foreign earned income exclusion and foreign tax credits, also have to be disclosed on the tax return. For foreign corporations it can even go one step further where the corporation can file a protective tax return. A protective corporate tax return is a return filed by a foreign corporation stating that although the corporation does not believe they have any U.S. filing requirement, the corporation reserves the right to claim deductions and other tax benefits if U.S. income is later found or deemed earned causing them to have to pay tax. Overall, foreign tax reporting is becoming one of the IRS’s most reviewed areas, and not properly reporting a valid position can cause many problems including severe penalties even if no additional tax is due.
Navigating international tax laws is difficult enough, but even when a valid conclusion is reached it is still imperative that it is properly reported. If you have questions about tax treaties, mitigating double taxation, or your foreign reporting requirements, contact us at Hone Maxwell LLP today for a complete analysis of your case. For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.