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Some ‘Dynamite’ Tax Considerations for When the Next BTS Calls

June 17, 2022, 8:45 AM

Imagine this scenario: You’re sitting at your desk one day, and your phone rings. It’s a friend of yours who manages a band in a foreign country. The band’s career is starting to take off—think BTS-level success here—and they’re looking to start touring in the US. In fact, a few members vacationed recently in Los Angeles and Miami and are even thinking of moving to the US. Their bandmates have no intention of moving, however, so the band could ultimately be a mix of resident and nonresident members.

And then your friend drops the bombshell: Can you give us some tax advice?

On one hand, this could be quite the lucrative engagement. On the other, it is likely to be rather complex and time-consuming. No one would blame you for taking a pass, but if you decide to take the plunge and offer your friend and the band some advice, here are some things you’ll want to consider.

Pour yourself a stiff drink.

Yes, it is kind of snarky, but by the time you finish reading all the rules and regulations that will come into play (and remember, this is only the tax portion—there are plenty of other rules that may affect your ultimate decision), you will probably be wishing you had poured one.

Taxes can never be painted with a broad brush.

It is easy to label the US as a high tax jurisdiction. But upon closer inspection, the real answer is: It depends on what tax we are discussing. For example, the highest corporate tax bracket in the US is 21%; it’s 19% in the UK. While the US is technically higher, it’s not too far above the competition.

Furthermore, merely comparing tax rates doesn’t really paint an accurate picture. When you consider the top individual tax rates—37% versus 45%, respectively—it’s clear that the US’ highest bracket is lower than the UK’s. But there’s even more to the story, because a UK resident hits that 45% tax rate very quickly: at around $150,000. On the other hand, the US resident earning the same income is taxed at a much lower rate—generally around 24% for someone earning $150,000.

‘Crossing streams’ doesn’t always work.

Looking at the above, you might be tempted to tell the client to “live in the US and have all your income paid to your company in the UK, which then pays you a salary in the US.” At least on paper, that would seem to be ideal. Your client’s company pays the lowest corporate rate, your client pays theoretically the lowest individual rate, and you’ve managed to mitigate the tax impact. Not quite. There are myriad rules about US individuals owning foreign corporations, and plenty of clawback, throwback, and anti-abuse provisions to review.

Don’t forget local taxes.

You might be able to reduce your federal tax burden by taking advantage of treaties, but that won’t impact your state taxes or local taxes. Treaties only affect taxes at the highest levels and have no impact on state taxes. Moreover, you may or may not get a credit for taxes paid to other jurisdictions. Consider this scenario: A screenwriter who is a Vancouver resident drafts a screenplay and sells it to Paramount Studios in Los Angeles. That writer now potentially has income in four jurisdictions: Canada, the US, California under market sourcing rules, and British Columbia. The US/Canada income problem is solved via treaty, but there is no similar California/British Columbia agreement.

Fifteen months of planning can be undone in 15 minutes.

Or 15 seconds—basically, in the time it takes to sign a bill into law. Fortunately, government never turns on a dime, so you’ll have some advance warning. But even so, planning moves aren’t always easy to undo. And sometimes, they can’t be undone at all, and you will just have to deal with that. Which leads into the next point.

You are often working with imperfect information.

Clients want certainty. Unfortunately, that’s the one thing you can’t give in tax planning. Consider, for example, Section 83(b) elections. If you make the election, you’re betting that the stock issued will increase in value and you’ll “win” by only paying capital gains taxes. It is equally possible that the stock will tank and you won’t have a tax benefit from the loss. It would be nice to have a crystal ball to know for sure, but you don’t. You just have to take your best guess. Your client, of course, will assume the best. It’s your job to warn them about the other outcome.

It’s the small things that get you.

Smaller jurisdictions, which don’t have a large pot of funds to draw from, can be far more aggressive in audits and far more aggressive in collections. Sure, the tax hit isn’t as big. And state and local considerations are often secondary when the federal dollars get big but run afoul of the local jurisdiction, and things can get ugly fast. If things get tight, deal with the local jurisdiction first. The federal government is much easier (and willing) to work with than most state and local jurisdictions.

Figure out where you want to be first.

Seriously. Foreign/US tax planning is extremely complex, and there are plenty of traps. If you want to be in the US, but you have a foreign entity, that’s one thing. Living abroad and having US income is another. They are very separate paths that don’t cross well—that is, if you set up your planning as a foreigner living outside the US and then decide to move to the US, converting the income can get painful. It might be better to be an occasional—or somewhat frequent—visitor than to be a permanent resident or citizen. Make sure you nail down your client’s preferences before you get too far into the weeds and have to start over.

Good luck.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Gregory Zbylut is a tax attorney and business manager in Burbank, Calif., where he works with high net worth and ultra-high net worth clients and family offices. His practice includes clients in the areas of entertainment, real estate, and investing.

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