Insights

The Alternative Minimum Tax (AMT) was introduced in the United States in 1969 to ensure that high-income taxpayers contributed a minimum amount of tax, thereby precluding them from significantly reducing or eliminating their tax liability through the regular tax system. Similarly, the Corporate Alternative Minimum Tax (CAMT) was first instituted under the Tax Reform Act of 1986 to achieve a parallel objective for corporations.

In 2022, CAMT was reintroduced under the Inflation Reduction Act. This updated version encompasses more detailed and intricate provisions, reflecting a modernized approach to maintaining tax compliance among corporations.

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Introduction of the New CAMT and Its Impact

The revised Corporate Alternative Minimum Tax (CAMT) enforces a 15% minimum tax on the Adjusted Financial Statement Income (AFSI) of large corporations with a three-year average annual AFSI exceeding $1 billion. This tax is applicable for tax years commencing after December 31, 2022.

This change marks a significant departure from the previous CAMT, as it is now based on AFSI rather than taxable income. The updated CAMT considers income that meets the threshold over a three-year period. Financial statement income is typically higher than taxable income due to the limited inclusion of tax deductions and credits.

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CAMT Impact on Private Equity

The proposed regulations facilitate the aggregation of entities not traditionally consolidated in financial statements, such as portfolio companies controlled by private equity funds engaged in a trade or business, under the Corporate Alternative Minimum Tax. Subsidiaries of private equity funds not engaged in a trade or business are not explicitly included, and commenters suggest they should not be aggregated without further guidance, which is anticipated upon finalization of the regulations. This single entity rule could result in more blockers or public companies utilizing Up-C structures being classified as “applicable corporations” if their group meets the $1 billion threshold for Adjusted Financial Statement Income.

The regulations apply the constructive ownership rules under IRC Section 1563(d)(1)(B) to attribute control through partnerships. Consequently, private equity funds’ indirect ownership of portfolio companies could count towards the CAMT threshold, increasing the likelihood of exceeding the $1 billion threshold. For instance, a private equity fund with a foreign partnership owning both foreign and domestic blocker corporations, each owning a domestic portfolio company, would see these portfolio companies included in the Foreign Parented Multinational Group (FPMG) since they are part of the same single employer group as the blockers. This broader group could potentially meet the threshold for applicable corporation status.

The Corporate Alternative Minimum Tax (CAMT) introduces considerable complexity for private equity funds by necessitating the calculation and reporting of Adjusted Financial Statement Income (AFSI) for their entire group, encompassing both foreign and domestic entities. Private equity funds may be required to consolidate financial data from a diverse array of investments, even those not traditionally consolidated for financial reporting purposes. This comprehensive approach has the potential to impact the overall tax liability of the fund.

Furthermore, the Treasury’s proposed bottom-up approach is anticipated to significantly increase the workload for partnerships and corporations holding partnership interests. Partnerships will need to calculate their AFSI and ensure precise reporting to their CAMT entity partners upon request. Such requests must be addressed within 30 days of the end of the partnership’s tax year, particularly if the CAMT entity partner cannot ascertain its distributive share of the partnership’s AFSI without this information.

When requested by a CAMT entity partner, a partnership is obligated to furnish it to the CAMT entity partner. Once a request is made, the partnership must continue to supply the information for each subsequent taxable year unless otherwise notified. An upper-tier partnership must request the relevant information from a lower-tier partnership, which must file the information with the IRS and provide it to the upper-tier partnership.

This intricate process could significantly increase the compliance burden, prompting investment funds to carefully consider accepting subscriptions from entities potentially subject to CAMT. Consequently, partnerships may need to maintain four distinct sets of records:

a. financial accounting;

b. tax basis;

c. IRC Section 704(b) economic capital accounts; and

d. CAMT

Tax professionals and stakeholders have recommended that the Treasury implement safe harbors or simplified methods to alleviate the reporting burden, particularly for companies holding minority stakes in partnerships. Without such simplifications, many entities could experience a substantial increase in their compliance workload.

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Adapting to CAMT

Corporate tax departments must have a comprehensive understanding of the new Corporate Alternative Minimum Tax (CAMT) rules and their implications under the Inflation Reduction Act. In 2023, the IRS provided consistent guidance to clarify various aspects of CAMT. The September guidance offered detailed instructions on determining a company’s financial statement income and Adjusted Financial Statement Income (AFSI), and outlined the circumstances under which corporations are subject to CAMT. This includes CAMT foreign tax credits, tax consolidated groups, foreign corporations, depreciable property, wireless spectrum, duplications and omissions of certain items, and financial statement net operating losses.

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CAMT’s Impact on Corporate Tax Liabilities

For businesses meeting the $1 billion threshold, it is imperative to review tax liabilities comprehensively. Corporate tax leaders must analyze both regular taxable income and financial statements. CAMT liability is determined by applying a flat tax rate to adjusted income, which includes adding back certain tax preference items and making necessary adjustments. If the CAMT liability exceeds the regular tax liability, the company must pay the CAMT amount. This can limit the benefits of deductions and credits, potentially resulting in a higher tax bill. The impact will vary based on the company’s financial situation, use of deductions and credits, and any changes in tax legislation.

The CAMT imposes limitations on the utilization of tax credits and net operating losses (NOLs), impacting deferred tax assets (DTAs) and liabilities reported on financial statements. This can diminish the availability of future tax benefits and affect cash flow projections, necessitating adjustments to long-term tax planning strategies. Ensuring compliance with SEC and IRS regulations is vital to maintaining accurate financial reporting, avoiding legal penalties, and upholding investor trust. Non-compliance can result in audits, fines, and reputational damage, ultimately affecting stock value and stakeholder confidence.

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The information contained in this post is merely for informative purposes and does not constitute tax advice. For more information, feel free to reach us at [email protected]

Copyright 2025 Small World Business Advisors LLC www.swbadvisors.com

The Treasury and the IRS have issued final regulations under Section 861 (the “2025 final regulations”), addressing transactions involving “digital content” and certain “cloud transactions.” For these purposes:

• Digital content refers to computer programs or other materials—such as books, movies, and music—provided in digital format. This includes content protected by copyright law, or content that has entered the public domain due to the expiration of copyright protection or a creator’s dedication of the material to the public domain.
• Cloud transactions involve obtaining on-demand network access to computer hardware, digital content, or similar resources.

These regulations primarily affect taxpayers involved in digital content or cloud transactions. They will take effect for taxable years beginning on or after their publication date in the Federal Register, currently scheduled for January 14, 2025.

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The 2025 final regulations generally align with the framework established in the 2019 proposed regulations, incorporating several revisions. Key updates include:

1. Replacing certain de minimis rules with a “predominant character” rule for classifying transactions with multiple components.
2. Using the purchaser’s billing address, rather than the “place of sale,” “title passage,” or place of download, to source income from sales of copyrighted articles via digital platforms that are not governed by Section 863(b).
3. Characterizing all cloud transactions exclusively as services transactions, eliminating the multifactor “services vs. lease” test outlined in the 2019 proposed regulations.

In addition, Treasury and the IRS have published proposed regulations (Proposed Regulations) to clarify the sourcing of income from cloud transactions. These Proposed Regulations aim to provide taxpayers with greater certainty and facilitate IRS audits. Taxpayers earning gross income from cloud transactions will be impacted. Public comments on the Proposed Regulations are due within 90 days of their publication in the Federal Register, currently expected on January 14, 2025.

The Proposed Regulations introduce a taxpayer-specific approach for sourcing income from cloud transactions, focusing on the economic contributions made by intangibles, employees, and assets involved in performing the cloud transaction. They also outline a mathematical formula to determine the source of such income, factoring in:

1. The intangible property contribution,
2. The personnel contribution, and
3. The tangible property contribution.

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Finally, the IRS has released Notice 2025-6, soliciting comments on the potential implications of extending the characterization rules in Regulations 1.861-18 and 1.861-19, as amended by the 2025 final regulations, to all provisions of the Internal Revenue Code. Currently, the 2025 final regulations apply only to specific international provisions of the Code, as detailed within the regulations.

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The 2025 final regulations finalize Proposed Regulation 1.861-18, extending the income classification rules for computer programs to other forms of digital content and updating certain existing rules for characterizing income. Additionally, the final regulations finalize Proposed Regulation 1.861-19, offering guidance on how to characterize income from transactions involving on-demand network access to computer hardware, digital content, and similar resources.

The Proposed Regulations emphasize the need for specific sourcing rules to address the unique nature of income from cloud transactions. These regulations would take effect for tax years beginning on or after the publication of the final rules in the Federal Register.

For more information on the impact of these rules on your transactions or business, feel free to reach us at [email protected]

On December 23, 2024, the Tax Court reaffirmed its interpretation of the “limited partner exception” to self-employment tax under section 1402(a)(13) of the Internal Revenue Code in Denham Capital Management LP v. Commissioner (T.C. Memo. 2024-114).

This decision echoes its earlier ruling in Soroban Capital Partners LP v. Commissioner (161 T.C. No. 12) and has broader implications for active limited partners in state law limited partnerships.

This article examines the legal background, the Soroban case, and the facts and findings of the Denham Capital case, along with related pending cases that challenge these interpretations.

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Background

Under IRC Section 1402(a), net earnings from self-employment are generally subject to self-employment tax. However, Section 1402(a)(13) provides an exception for the distributive share of income received by a limited partner—excluding guaranteed payments for services rendered.

Congress intended this exception to shield passive investors in partnerships from self-employment tax. However, over time, disputes have arisen over whether individuals who actively participate in the management or operations of partnerships qualify for the “limited partner exception.”

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Soroban Capital Partners LP v. Commissioner (161 T.C. No. 12)

Facts of Soroban Capital

Soroban Capital Partners LP, a state law limited partnership was engaged in investment management. Several of its partners were designated as limited partners under state law but were actively involved in the partnership’s day-to-day operations, including management and decision-making.

Court’s Findings

The Tax Court ruled that these partners did not qualify for the “limited partner exception” to self-employment tax because:

1. Their roles were active and managerial, rather than passive.
2. The “limited partner” designation under state law does not control for purposes of applying federal tax law.

Instead, the Court applied a functional analysis, emphasizing the nature of the work performed rather than formal titles.

Key Takeaway

The Soroban decision established a precedent that active involvement in a partnership’s business activities disqualifies partners from claiming the limited partner exception to self-employment tax, even if they are designated as limited partners under state law.

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Denham Capital Management LP v. Commissioner (T.C. Memo. 2024-114)

Facts of Denham Capital

Denham Capital Management LP, similar to Soroban, was organized as a state law limited partnership involved in investment management. Its limited partners actively participated in:

• Strategic decision-making
• Managing investments
• Supervising day-to-day operations

The IRS assessed self-employment tax on the distributive shares allocated to these limited partners, which the taxpayers disputed, relying on their limited partner designation under state law.

Court’s Findings

The Tax Court reaffirmed the Soroban ruling, emphasizing that:

1. State law designations do not override federal tax law.
2. Partners who actively participate in a partnership’s operations are not passive investors.
3. A functional test applies, focusing on the substance of the partner’s role rather than formal titles.

Implications

The Denham decision strengthens the IRS’s position that active limited partners cannot use the limited partner exception to avoid self-employment tax, increasing compliance requirements for partnerships with active participants.

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Related Cases: Sirius Solutions and Point72 Asset Management

Sirius Solutions LLLP v. Commissioner (Docket No. 30118-21)

Sirius Solutions challenged the Soroban interpretation and is appealing the Tax Court’s similar ruling to the Fifth Circuit Court of Appeals. This case could potentially lead to a circuit split, adding uncertainty to the application of Section 1402(a)(13).

Point72 Asset Management, L.P. v. Commissioner (Docket No. 12752-23)

Point72 remains in Tax Court and raises similar arguments about the definition of “limited partner.” Its outcome could either reinforce or challenge the Soroban precedent.

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Broader Impact and Future Considerations

The Denham and Soroban decisions highlight a growing judicial trend to look beyond state law labels and focus instead on functional roles in determining tax obligations. Key considerations include:

1. Active Participation – Any partner performing managerial or operational roles faces greater scrutiny.
2. Entity Structuring – Partnerships may need to revisit their operating agreements and consider alternative structures.
3. Compliance Risks – Taxpayers should prepare for IRS audits and litigation risks if relying on the limited partner exception.
4. Legislative Clarification – Congress may eventually issue guidelines under Section 1402(a)(13) to provide clearer guidance on what constitutes a “limited partner.”

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The reaffirmation of Soroban in Denham Capital Management LP v. Commissioner represents a significant step in resolving disputes over the limited partner exception to self-employment tax. With Sirius Solutions and Point72 still pending, the issue remains contentious, and practitioners should closely monitor these developments.

For partnerships with active participants, these rulings emphasize the need for careful tax planning and documentation to mitigate risks of adverse IRS determinations. Consulting tax professionals and legal advisors is highly recommended to navigate this complex and evolving area of tax law.

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The information contained in this post is merely for informative purposes and does not constitute tax advice. For more information, feel free to reach us at [email protected]

Copyright 2025 Small World Business Advisors LLC www.swbadvisors.com

On December 18, 2024, Representative Darin LaHood, a member of the House Committee on Ways and Means, introduced the Residence-Based Taxation for Americans Abroad Act, a bill that would implement a residence-based taxation system for U.S. citizens currently living overseas. The legislation seeks to transition from the current citizenship-based taxation system to a residence-based taxation model, aligning the U.S. with the tax practices of other major countries.

Similar bills/initiatives have been proposed in the past. However, this legislative effort aligns with President-elect Donald Trump’s campaign promise to eliminate U.S. income taxes for Americans living abroad, marking a significant shift in U.S. tax policy. These efforts reflect growing awareness of the unique challenges faced by American expats. Comprehensive reforms have yet to be implemented.

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Key Provisions of the Bill

Residence-Based Taxation Election:

The bill allows U.S. citizens residing abroad to opt into a residence-based taxation system. Under this system, expatriates would be taxed solely by their country of residence on foreign income, exempting them from U.S. taxes on such income. However, they would remain liable for U.S. taxes on income sourced within the United States, as is the case for majority of the countries following source-based tax system.

Departure Tax for Wealthy Individuals:

To prevent tax avoidance by high-net-worth individuals, the bill introduces a “departure tax.” The proposed tax would apply to those with a net worth exceeding the estate tax threshold (currently $13.61 million) who choose to switch to the residence-based system. It effectively treats all their assets as if sold before the transition, ensuring the U.S. collects taxes on unrealized gains.

Exemptions from Departure Tax:

Under the proposal, certain expatriates can avoid the departure tax, including:

• Individuals who haven’t lived in the U.S. since turning 25 or since March 2010.
• Those who have resided abroad for at least three of the past five years and have complied with U.S. tax laws.

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Contextual Background

The current U.S. tax system requires citizens to file returns on worldwide income, regardless of residence, leading to complex compliance burdens, especially for middle-income Americans abroad. The United States stands alone among major nations in employing a citizenship-based taxation system, imposing taxes on individuals regardless of their residence or whether they earn income within the U.S. This proposed legislation would grant Americans residing abroad the option to be classified as non-resident Americans, subjecting them to U.S. taxes solely on income and gains derived from U.S. sources.

Recent estimates suggest that over 5 million U.S. citizens are currently residing abroad. This population includes Americans who were born and raised in the United States but have chosen to live overseas indefinitely, as well as “accidental Americans”—individuals with dual U.S. and foreign citizenship who may be unaware of their U.S. citizenship status.

In recent years, this issue has gained increasing attention and was a key priority for President-elect Trump during his campaign. In an October interview with The Wall Street Journal, President Trump expressed his support for reform, stating, “I support ending the double taxation of overseas Americans.”

“This is a non-partisan issue that impacts U.S. citizens with ties to districts across the country,” said Representative Darin LaHood. “In today’s interconnected world, many Americans choose to live and work abroad for a variety of reasons. They should not be subjected to excessive tax and compliance burdens for doing so. I look forward to collaborating with President-elect Trump and my colleagues on both sides of the aisle to modernize our tax code and ensure Americans abroad are treated fairly.”

“For the first time in decades, Americans living abroad can see a potential resolution to the significant challenges they’ve faced, including costly compliance fees, strained personal relationships, and the inability to live normal lives,” said Brandon Mitchener, Executive Director of Tax Fairness for Americans Abroad (TFFAA). “We deeply appreciate Rep. LaHood’s leadership and are eager to work with him to gather feedback and advance this bipartisan legislation to the president’s desk next year.”

Rep. LaHood collaborated closely with TFFAA in drafting the bill. TFFAA is a U.S.-based non-profit organization whose board members have firsthand experience navigating the complex U.S. tax and financial regulations that impact Americans abroad. The organization’s mission is to advocate for a tax system that bases taxation on residence and source, rather than citizenship.

The introduction of this bill marks an important opportunity for stakeholders and Americans abroad to provide feedback before its reintroduction in the 119th Congress. Rep. LaHood remains optimistic that the bill will be included in a reconciliation package next year.

Expatriate advocacy groups have expressed support for the proposal, highlighting its potential to reduce administrative burdens and financial strains on Americans living overseas. Representative LaHood is seeking bipartisan backing and public feedback to refine the bill, ensuring it addresses revenue considerations and effectively serves the expatriate community.

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The information contained in this post is merely for informative purposes and does not constitute tax advice. For more information, feel free to reach us at [email protected]

Copyright 2025 Small World Business Advisors LLC www.swbadvisors.com

As the November elections approach, tax policy has emerged as a critical issue for American businesses. The 2017 Tax Cuts and Jobs Act (“TCJA”), enacted during Former President Donald Trump’s presidency, includes several provisions set to expire in 2025, making tax proposals from both candidates particularly relevant.

While the policies of Vice President Kamala Harris and Donald Trump both share some common ground, such as eliminating income tax on tips and expanding the child tax credit, significant differences exist in their tax plans.

The tax policies of Donald Trump and Kamala Harris for the 2024 presidential election present distinct approaches to corporate, individual, and trade taxes. Here is how their policies compare.

Corporate Tax Rates

Kamala Harris: Proposes raising the corporate tax rate from 21% to 28%, aligning with previous proposals by President Biden.

Donald Trump: Suggests reducing the corporate tax rate to between 15% and 20%, specifically incentivizing companies that manufacture domestically.

Individual Income Taxes

Kamala Harris: Plans to increase the top individual income tax rate from 37% to 39.6% for individuals earning more than $400,000, while ensuring no tax increases for those earning less.

Donald Trump: Aims to make the individual tax cuts from the TCJA permanent, which would benefit higher-income earners more significantly.

Capital Gains Taxes

Kamala Harris: Supports raising the capital gains tax rate to 33% for individuals earning over $1 million annually, including a new tax on unrealized capital gains for those with a net worth over $100 million.

Donald Trump: Has not proposed specific changes to capital gains taxes.

Child Tax Credit

Kamala Harris: Proposes increasing the child tax credit significantly, offering $3,600 for children aged 0-5 and $3,000 for children aged 6-17.

Donald Trump: Supports maintaining the current child tax credit at $2,000 per child but has not detailed plans for expansion.

Trade and Tariffs

Kamala Harris: The Biden-Harris administration has implemented tariffs on specific imports such as electric vehicles and certain raw materials, aiming to raise revenue without significantly impacting household incomes.

Donald Trump: Proposes a universal baseline tariff on all imports between 10% and 20%, with a specific 60% tariff on imports from China, which could reduce after-tax incomes for American households.

Other Proposals

Both candidates agree on exempting tips from income taxation to support hospitality workers.

Kamala Harris: Plans to increase deductions for small business startups and provide down payment assistance for first-time homebuyers.

Donald Trump: Proposes exempting Social Security benefits and overtime pay from taxation.

These proposals reflect differing priorities in terms of economic growth, income distribution, and fiscal policy impacts. Both candidates’ plans are projected to increase the national deficit over the next decade, with varying effects on different income groups.

Photo Credits: BBC News

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The information contained in this post is merely for informative purposes and does not constitute tax advice. For more information, feel free to reach us at [email protected]

Copyright 2025 Small World Business Advisors LLC www.swbadvisors.com

On Wednesday, August 7, 2024, Italian government approved a measure that increases the “flat-tax” imposed on individuals who elect to be part of the regime and obtain tax residency in Italy. The decree doubles the existing 100,000 euros flat-tax to 200,000 euros (approximately $218,000) per year.

The “flat-tax” regime in essence is a cap on tax on foreign sourced income for high-net-worth individuals. These flat-tax rules serve as an incentive for foreigners to transfer their residence to Italy while also coaxing Italians living abroad to repatriate.

The favourable tax regime for rich new residents was originally introduced by a centre-left government in 2017, with a view to lure ultra-high spenders to boost Italy’s sluggish economy.

The doubling of the flat tax will only apply on a prospective basis, the decree spells out, clarifying that those who are already part of the regime will be grandfathered in.

The increase has garnered mixed reactions amongst the wealthy expats community; where some taxpayers question the stability and predictability of the “flat-tax” regime.

Overview of the Italy’s Flat-Tax Regime

The regime replaces the standard progressive income tax rate with an annual “flat tax” of €100,000 (now €200,000) on all foreign-sourced income for a period of up to 15 years.

The existing €100,000 tax incentive, while popular with wealthy individuals, has been controversial among Italian locals who blame the recent influx of the super-rich for a sharp increase in real estate prices and other rises in living costs.

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The information contained in this post is merely for informative purposes and does not constitute tax advice. For more information, feel free to reach us at [email protected]

Copyright 2025 Small World Business Advisors LLC www.swbadvisors.com

July 1, 2024

U.S. and Switzerland executed a new intergovernmental agreement (“IGA”) to implement the U.S. Foreign Account Tax Compliance Act (“FATCA”) on June 27, 2024, in Bern, Switzerland.

The new Model 1 IGA, to come into effect starting 2027, provides for the reciprocal automatic exchange of information, addresses legal impediments, reduces burdens for Swiss financial institutions, and improves international tax compliance.

Previously (in its current form through 2026), the United States and Switzerland signed a Model 2 IGA to facilitate the implementation of FATCA, which entered into force on June 2, 2014, pursuant to which Switzerland unilaterally provides information on financial accounts to the U.S. Under the Model 1 IGA effective 2027, Switzerland will begin to receive corresponding information from the U.S. through automatic exchange of information. The current (Model 2) IGA will terminate upon entry into force of the new Model 1 IGA.

FATCA came into effect in 2014, requiring foreign financial institutions to provide U.S. tax authorities with information about US accounts or face withholding taxes

“This agreement improves the lives of Americans living and working in Switzerland and Swiss citizens living and working in the United States, who contribute to our joint prosperity. This agreement will further strengthen the thriving personal and economic ties between our Sister Republics.” – Scott Miller, U.S. Ambassador

The U.S. Congress enacted FATCA in 2010 as part of the Hiring Incentives to Restore Employment Act. FATCA requires foreign financial institutions to report to the Internal Revenue Service information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

The June 27 2024 Agreement

Courtesy: State Secretariat for International Finance SIF

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The information contained in this post is merely for informative purposes and does not constitute tax advice. For more information, feel free to reach us at [email protected]

Copyright 2025 Small World Business Advisors LLC www.swbadvisors.com