Mastering U.S. Tax Reporting of Foreign Retirement Account Ownership and Distributions

Transcription

1 FOR LIVE PROGRAM ONLY Mastering U.S. Tax Reporting of Foreign Retirement Account Ownership and Distributions THURSDAY, FEBRUARY 9, 2017, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at x10 (or x10). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be ed to registered attendees. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

2 Tips for Optimal Quality FOR LIVE PROGRAM ONLY Sound Quality When listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, please immediately so we can address the problem.

3 Mastering U.S. Tax Reporting of Foreign Retirement Account Ownership and Distributions Feb. 9, 2017 Morris N. Robinson, Esq., CPA, LL.M., Managing Director M. Robinson & Co., Boston Robert E. Ward, Esq., LL.M., Shareholder Ward Chisholm P.C., Bethesda, Md.; Vancouver, B.C. Patricia Weisgerber, Esq., LL.M. M. Robinson & Co., Boston

4 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

5 Mastering U.S. Tax Reporting of Foreign Retirement Account Ownership and Distribution I. Classification of Foreign Pensions, Annuities, and Social Security 4520 East-West Highway, Suite 650 Bethesda, Maryland Strafford February 9, 2017 Presentation By Robert E. Ward, J.D., LL.M. Ward Chisholm, P.C One Bentall Centre, 505 Burrard Street Vancouver, British Columbia V7X 1M5

6 Scope of Topic Current Year Tax and Reporting Obligations of U.S. Citizens and lawful permanent residents who have financial interests in non-u.s. ( foreign ) retirement accounts and government-sponsored old age, disability, and survivors pensions Robert E. Ward, J.D., LL.M. All Rights Reserved 6

7 Types of Foreign Retirement Plan Arrangements Government Funded Old Age Programs (Social Security Analogs) Employer Sponsored Retirement Plan Arrangements Employer-Funded: IRC 402(b) Nonexempt Trust Employee-Funded: Grantor Trust Participant Funded Tax-Favored Retirement Arrangements Unfunded Arrangements Treaty and Non-Treaty Countries 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 7

8 Tax Treaties Determine Taxation of Benefits Deductibility of Contributions Taxation of Plan Accruals Taxes may be imposed by The United States Country in which participant resides (if different than U.S.) Source country (if different than country of residence) 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 8

9 Does a Treaty Apply? In most (all?) cases, in order for a treaty between the United States and another country to have any relevance the plan participant must be a resident of the treaty jurisdiction. The situs of the of the plan or trust from which benefits are paid is irrelevant (for purposes of determining treaty relevance). The domestic laws of each country apply to determine residency Robert E. Ward, J.D., LL.M. All Rights Reserved 9

10 Determining Residency Treaty Tiebreaker Rules In which country does the participant have a permanent home? In which country does the participant have closer personal and economic relations? In which country does the participant have an habitual abode? In which country is the participant a citizen? If residency can not be determined under the preceding questions, then residency will be determined by the Competent Authorities of each country Robert E. Ward, J.D., LL.M. All Rights Reserved 10

11 No Relevant Treaty Contributions and Accruals: U.S. Taxation depends on the rights of the participant under the domestic law of the country in which the retirement arrangement is established and maintained. Distributions: In most cases, the source country will tax. U.S. will certainly tax (subject to basis offset). Tax credit for foreign taxes paid under IRC Robert E. Ward, J.D., LL.M. All Rights Reserved 11

12 Foreign Retirement Plans and United States Qualified Plans M. Robinson & Company, P.C. Tax Law Specialists 160 Federal St. Boston, MA (617) Attorney Morris N. Robinson, CPA, LL.M Attorney Patricia Weisgerber, LL.M 12 (c) Copyright M. Robinson & Company February All Rights Reserved.

13 What is a U.S. Qualified Retirement Plan? 13 Compliance with Section 401, IRC, including: A trust created or organized in the United States Minimum participation standards Non-discrimination tests Contributions generally limited to employer, employee or both Minimum vesting standards Required distributions Tax Consequences Employer gets immediate contribution deduction Section 404(a) The trust which holds retirement plan assets does not pay taxes Section 501(a) The employee is subject to taxation when the income is distributed Section 72 (c) Copyright M. Robinson & Company February All Rights Reserved.

14 What is a Foreign Retirement Plan? 14 There is no IRC definition of a foreign retirement plan. Exception: If all requirements of a qualified retirement plan are met except the trust has a foreign status, the trust is exempt from tax Section 402(d). Foreign Situs Trust: Trustee is not a U.S. Person and/or the supervising court is not a U.S. court Section 7701(a)(30)(E) and Section 7701(a)(31). (c) Copyright M. Robinson & Company February All Rights Reserved.

15 15 Examples of Broad-Based Foreign Retirement Plans Provident Funds Provides for Healthcare, Housing and Retirement Jurisdictions Include: India, Malaysia, Singapore, South Africa, Mexico The Australian Superannuation Fund Covers Retirement Alone Canadian RRSP and RRIF Private Retirement Insurance Plans (c) Copyright M. Robinson & Company February All Rights Reserved.

16 16 Taxation of Beneficiaries of Non-Qualified ( Foreign ) Retirement Plans An acceptable definition of a Non-Exempt Employees Trust is a trust associated with a non-qualified retirement plan. The employer contributes more than 50 percent of the trust assets and maintains the plan for the benefit of the employees. - See, generally, Regulation 1.402(b)-1(b)(6). Beneficiaries of a foreign retirement plan are subject to tax under: Section 402(b) and related regulations (Employees Trusts) Section 679 (Foreign Grantor Trusts) Section 409A (Non-Qualified Deferred Compensation Plans) (c) Copyright M. Robinson & Company February All Rights Reserved.

17 17 Taxation of Beneficiaries of Foreign Retirement Plans: Ownership Employee Contributions Greater than 50% Ownership for Grantor Trust Purposes Employee is Owner/Grantor of portion Employee contributed. Employer is Owner of balance of trust account. See Treas. Reg (b)-1(b)(6) Employer Contributions Greater than 50% Ownership for Employees Trust Purposes Employer is Owner of the entire trust. See Treas. Reg (b)-1(b)(6) Employer Contributions Included in income, as vested. See Section 402(b)(1) Employer Contributions Included in income, as vested See Section 402(b)(1) (c) Copyright M. Robinson & Company February All Rights Reserved.

18 18 Taxation of Beneficiaries of Foreign Retirement Plans: Internal Build-Up Employee Contributions Greater than 50% Tax on Internal Build-Up of Income Employer s Portion is subject to tax upon distribution under Section 72. See Section 402(b)(2), but also see Highly Compensated Employee slide. Employee s Portion is subject to tax as a grantor trust. See Treas. Reg (b)-1(b)(6) & 679. Basis Adjustment for Reported Income See Treas. Reg (b)-1(b)(5) Employer Contributions Greater than 50% Tax on Internal Build-up of Income Employer is Owner of Entire Trust no Employer/Employee portions. See Treas. Reg (b)-1(b)(6) Income is subject to tax upon distribution under 72 (See 402(b)(2)). UNLESS Highly Compensated Employee in a discriminatory plan. See HCE slide. Basis Adjustment for Reported Income See Treas. Reg (b)-1(b)(5) (c) Copyright M. Robinson & Company February All Rights Reserved.

19 19 Taxation of Highly Compensated Employees (HCE) Highly Compensated Employees Employees Trusts Definition of Highly Compensated Employees Section 402(b)(4)(C) >5% Owner Section 414(q)(1)(A) $80,000 (indexed for inflation: $120,000) earned in preceding year, etc. Section 414(q)(1)(b) Issue if plan is discriminatory does not satisfy the requirements of Sections 401(a)(26) or 410(b). Amount Included: Inclusion in income of vested accrued benefit Section 402(b)(4)(A) (c) Copyright M. Robinson & Company February All Rights Reserved.

20 20 Taxation of Beneficiaries of Foreign Retirement Plans: Final Distributions Employee Contributions Greater than 50% Final Distributions Employer s Portion is subject to reporting under 72. See 402(b)(2). Employee s Portion is free of tax since income was previously taxed under 679. FATCA Reporting Form 8938: Statement of Specified Foreign Assets is required to be reported by the beneficiary. Employer Contributions Greater than 50% Final Distributions All Distributions from the Entire Trust are subject to tax under 72. No portions are free from tax. See 402(b)(2). FATCA Reporting Form 8938: Statement of Specified Foreign Assets is required to be reported by the beneficiary. (c) Copyright M. Robinson & Company February All Rights Reserved.

21 21 Taxation of Beneficiaries of Foreign Retirement Plans: Form 3520-A Employee Contributions Greater than 50% Foreign Grantor Trust Reporting Form 3520-A: Annual Information Return of Foreign Trust with a U.S. Owner. Must be filed by the Owner of a foreign trust. Employer Contributions Greater than 50% Foreign Grantor Trust Reporting Not Applicable (c) Copyright M. Robinson & Company February All Rights Reserved.

22 22 Taxation of Beneficiaries of Foreign Retirement Plans: Form 3520 Employee Contributions Greater than 50% Form 3520: Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts Contributions to a foreign employee s trust described in 402(b)(2) are not required to be reported by the transferor, if a U.S. person. See 6048(a)(3)(B)(ii). Contributions to a foreign grantor trust must be reported by the transferor, if a U.S. person per Form 3520 instructions. Distributions from any foreign trust made to a U.S. beneficiary are required to be reported per 6048(c). Employer Contributions Greater than 50% Form 3520: Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts Contributions to a foreign employee s trust described in 402(b)(2) are not required to be reported by the transferor, if a U.S. person. See 6048(a)(3)(B)(ii). Foreign grantor trust requirements are not applicable. Distributions from any foreign trust made to a U.S. beneficiary are required to be reported per 6048(c). (c) Copyright M. Robinson & Company February All Rights Reserved.

23 23 Taxation of Beneficiaries of Foreign Retirement Plans: PFIC Reporting Employee Contributions Greater than 50% PFIC Rules: Report PFICs on Form 8621 Employer s Portion of Trust PFIC rules do NOT apply due to the opaque doctrine for employee s trusts. See Treas. Reg T(b)(3)(ii) Employee s Portion of the Trust PFIC rules apply. The employee is treated as owning his or her beneficial share of the any foreign mutual funds (PFICs) owned by the grantor trust portion of the employee s trust. See 1298(a)(3). Employer Contributions Greater than 50% PFIC Rules: Report PFICs on Form 8621 Employer is treated as Owner of Entire Trust PFIC rules do NOT apply due to the opaque doctrine for employee s trusts. See Treas. Reg T(b)(3)(ii) The employee is not treated as owning any portion of the trust. (c) Copyright M. Robinson & Company February All Rights Reserved.

24 24 Taxation of Beneficiaries of Foreign Retirement Plans: Throwback Rules Employee Contributions Greater than 50% Throwback Rules Employer s Portion of Trust Throwback Rules do NOT apply to the employer s portion of the employee s trust due to the opaque doctrine. See Treas. Reg (a)-(0). Employee s Portion of the Trust Throwback Rules do NOT apply because the income was taxed as earned by a grantor trust. As a result, there is no undistributed income See 665(a). Employer Contributions Greater than 50% Throwback Rules Employer is treated as Owner of Entire Trust Throwback Rules do NOT apply due to the opaque doctrine for employee s trusts. See Treas. Reg T(b)(3)(ii) The employee is not treated as owning any portion of the trust, so throwback rules do NOT apply. (c) Copyright M. Robinson & Company February All Rights Reserved.

25 25 Non-Qualified Deferred Compensation Plans Section 409A A nonqualified deferred compensation plan must comply with various rules regarding the timing of income deferrals and plan distributions. subject to a substantial risk of forfeiture Section 409A(a)(1) Examples Severance Agreements Employment Agreements Change in Control Agreements Bonuses Long-Term Incentive Plans (c) Copyright M. Robinson & Company February All Rights Reserved.

26 26 Non-Qualified Deferred Compensation Plans Section 409A Non-qualified deferred compensation plans do not include qualified employer plans. Treas. Reg A-1(a)(2) Non-qualified deferred compensation plans potentially include employee trusts described in Section 402(b)(1), i.e. foreign retirement plans. Section 409A(d)(1) (c) Copyright M. Robinson & Company February All Rights Reserved.

27 27 Non-Qualified Deferred Compensation Plans Section 409A Foreign Plan Exceptions Excluded if a tax treaty applies. See Treas. Reg A-1(a)(3)(i). Certain broad-based foreign retirement plans are excluded. See Treas. Reg A-1(a)(3)(v). Non-elective deferrals by U.S. citizens and lawful permanent residents. See Treas. Reg A-1(a)(3)(iii). (c) Copyright M. Robinson & Company February All Rights Reserved.

28 Non-Qualified Deferred Compensation Plans Section 409A Certain Foreign Plan Exceptions 28 Broad-Based Foreign Retirement Plan Criteria Written arrangement Wide range of employees, substantially all are NRAs Nondiscriminatory in coverage and benefits Discourages use of plan benefits for non-retirement purposes Individual cannot be eligible to participate in U.S. qualified plan Deferral is non-elective and relates to foreign earned income Section 415 limits (on benefits and contributions) apply The above listing is not exhaustive. See Treas. Reg A-1(a)(3). (c) Copyright M. Robinson & Company February All Rights Reserved.

29 29 Non-Qualified Deferred Compensation Plans Section 409A: Penalties Penalty for Non-Compliance: All amounts deferred under the plan for the current year and all previous years become immediately taxable. See Section 409A(a)(1)(A) Plus, 20% penalty tax See Section 409A(b)(5)(A) Plus, interest at the underpayment rate plus 1%... on the underpayments that would have occurred had the amounts required to be included in gross income been includible in gross income for the taxable year in which first deferred or, if later, the first taxable year in which such amounts are not subject to a substantial risk of forfeiture. See Section 409A(b)(5)(B) Penalty also applies to increases in asset values. See Section 409A(b)(4) (c) Copyright M. Robinson & Company February All Rights Reserved.

30 30 Income Calculations: Tax Year 2016 (c) Copyright M. Robinson & Company February All Rights Reserved.

31 Income Calculations 31 Example 1: Foreign National/U.S. Resident Taxpayer Annual Income: $98,500 Single Foreign Pension Plan Does not meet 402(a) Foreign Individual Retirement Plan Foreign Deferred Compensation Plan Employer contributions: $4,925 (5% x $98,500) Plan Earnings Year-end Bond Portfolio Balance: $375, Contributions: $5,000 Interest Income: $11,175 Vested Accrued Benefit: $22,500 ($370,000 face value x 3% Annual Interest); ($5,000 x.015) (c) Copyright M. Robinson & Company February All Rights Reserved.

32 Income Calculations 32 Example 2: U.S. Citizen Working Overseas/Non-U.S. Employer Annual Income: $98,500 Single Foreign Pension Plan Does not meet 402(a) Employer contributions: $4,925 (5% x $98,500) Plan Earnings Foreign Individual Retirement Plan Meets 408 requirements Year-end Bond Portfolio Balance: $375, Contributions: $5,000 Interest Income: $11,175 ($370,000 face value x 3% Annual Interest); ($5,000 x.015) Foreign Deferred Compensation Plan Does not qualify under 409A Vested Accrued Benefit: $22,500 (c) Copyright M. Robinson & Company February All Rights Reserved.

33 Foreign Earned Income Exclusion 33 Amount: $101,300 (2016) (B) Certain amounts not included in foreign earned income The foreign earned income for an individual shall not include amounts (i) received as a pension or annuity, (ii) paid by the United States or an agency thereof to an employee of the United States or an agency thereof, (iii) included in gross income by reason of section 402(b) (relating to taxability of beneficiary of nonexempt trust) or section 403(c) (relating to taxability of beneficiary under a nonqualified annuity), OR (iv) received after the close of the taxable year following the taxable year in which the services to which the amounts are attributable are performed. (c) Copyright M. Robinson & Company February All Rights Reserved.

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35 Mastering U.S. Tax Reporting of Foreign Account Ownership and Distribution IV. Information Reporting 4520 East-West Highway, Suite 650 Bethesda, Maryland Strafford February 9, 2017 Presentation By Robert E. Ward, J.D., LL.M. Ward Chisholm, P.C One Bentall Centre, 505 Burrard Street Vancouver, British Columbia V7X 1M5

36 U.S. Information Returns Owners of File Foreign Financial Accounts FinCEN Form 114 Form 8938 Foreign Trust Form 3520/3520-A Passive Foreign Investment Company Foreign Corporation (10% Threshold Vote or Value) Foreign Partnership (10 % Threshold Capital, Profits, Deductions, or Losses) Form 8621 Form 5471 Form 8865 Treaty Protected Positions Form 8833 FATCA Reporting Form W8-BEN-E 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 36

37 Report of Foreign Bank and Financial Account (FinCEN Form 114) What accounts? Bank Accounts: a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking. 31 C.F.R. Section (c)(1). Securities Accounts: an account with a person engaged in the business of buying, selling, holding, or trading stock or other securities. 31 C.F.R. Section (c)(2). Other Financial Accounts: an account with a person that is in the business of accepting deposits as a financial agency (31 C.F.R. Section (c) (3)(i)); an account that is an insurance or annuity policy with a cash value (31 C.F.R. Section (c)(ii)); an account with a person that acts as broker or dealer for futures or options transactions in any commodity or subject to the rules of a commodity exchange or association (31 C.F.R. Section (c)(3)(iii)); Mutual funds or similar pooled funds; or Other investment funds Robert E. Ward, J.D., LL.M. All Rights Reserved 37

38 Report of Foreign Bank and Financial Account (FinCEN Form 114) What is a financial interest in an account? Owner of record or holder of legal title: a United States person has a financial interest in each bank, securities, or the financial account in a foreign country for which he is the owner of record or has legal title whether the account is maintained for his own benefit or for the benefit of others. 31 C.F.R. Section (e)(1). (Emphasis supplied.) Other Financial Interests: Accounts with respect to which another person acts as an agent, nominee, attorney, or in some other capacity on behalf of the United States person (31 C.F.R (e)(2)(i)); a corporation in which the United States person owns directly or indirectly more than 50% of the voting power or the total value of the shares, a partnership in which the United States person owns directly or indirectly more than 50% of the interest in profits or capital, or any other entity in which the United States person owns directly or indirectly more than 50% of the voting power, total value of the equity interest or assets, or interest in profits (31 C.F.R. Section (e)(2)(ii)); any trust with respect to which a United States person is treated as the owner under Internal Revenue Code Section and regulations thereunder (commonly referred to as a grantor trust ); and any trust in which the United States person either has a beneficial interest in more than 50% of the assets or from which such a person receives more than 50% of the current income (31 C.F.R. Section (e)(ii)(iv)) Robert E. Ward, J.D., LL.M. All Rights Reserved 38

39 Report of Foreign Bank and Financial Account (FinCEN Form 114) What is a financial interest in an account? Signature or Other Authority: the authority of an individual (alone or in conjunction with another) to control the disposition of money funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained. (31 C.F.R. Section (f). Special Rules: Participants and beneficiaries in retirement plans under sections 401(a), 403(a) or 403(b) of the Internal Revenue Code as well as owners and beneficiaries of individual retirement accounts under section 408 of the Internal Revenue Code or Roth IRAs under section 408A of the Internal Revenue Code are not required to file an FBAR with respect to a foreign financial account held by or on behalf of the retirement plan or IRA. The authority of an individual (alone or in conjunction with another) to control the disposition of money funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained. (31 C.F.R. Section (g)(4). A beneficiary of a trust described in paragraph (e)(2)(iv) of this section is not required to report the trust's foreign financial accounts if the trust, trustee of the trust, or agent of the trust is a United States person that files a report under this section disclosing the trust's foreign financial accounts. (31 C.F.R. Section (g)(5) 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 39

40 FBAR Due Date Former June 30 date amended by Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 April 15, subject to six-month extension. Applies to taxable years beginning after December 31, Robert E. Ward, J.D., LL.M. All Rights Reserved 40

41 FBAR Penalties Violation Civil Penalties Criminal Penalties Negligent Violation Non-Willful Violation Pattern of Negligent Activity Willful Failure to File FBAR or retain records of account Willful Failure to File FBAR or retain records of the account while violating certain other laws Knowingly and Willfully Filing False FBAR Up to $500 for each negligent violation Up to $10,000 for each nonwillful violation In addition to penalty under 5321 (a)(6)(a) With respect to any such violation, not more than $50,000 Up to the greater of $100,000 or 50 percent of the amount in the account at the time of the violation Up to the greater of $100,000 or 50 percent of the amount in the account at the time of the violation Up to the greater of $100,000 or 50 percent of the amount in the account at the time of the violation N/A N/A N/A Up to $250,000 or 5 years or both Up to $500,000 or 10 years or both $10,00 or 5 years or both 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 41

42 FBAR Penalty Relief Surface Transportation and Veterans Health Care Choice Improvement Act of (b)(ii) For any taxpayer required to file such Form for the first time, any penalty for failure to timely request for, or file, an extension, may be waived by the Secretary. Internal Revenue Manual After May 12, 2015, in most cases, the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. In such cases, the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined, subject to the maximum penalty limitation in 31 USC 5321(a)(5)(C) for each year. IRM (2) After May 12, 2015, in most cases, examiners will recommend one penalty per open year, regardless of the number of unreported foreign accounts. The penalty for each year is limited to $10,000. Examiners should still use the mitigation guidelines and their discretion in each case to determine whether a lesser penalty amount is appropriate. IRM (1) If an account is co-owned by more than one person, a penalty determination must be made separately for each co-owner. The penalty against each co-owner will be based on his her percentage of ownership of the highest balance in the account. If the examiner cannot determine each owner s percentage of ownership, the highest balance will be divided equally among each of the co-owners. IRM (4) 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 42

43 Form 8938 Statement of Specified Foreign Financial Assets What is Reported? Any Foreign Bank and Investment Accounts including foreign hedge funds, mutual funds, and private equity funds Any Equity or Debt interest in foreign financial institutions whether or not traded on an established securities market Any stock or securities held for investment and issued by someone who is not a U.S. Person Any debt or equity interest in a foreign entity Any financial investment or contract that has an issuer or counterparty that is not a U.S. person. Any capital or profits interest held for investment in a foreign partnership Any form of debt with respect to which the borrower is a foreign person Any interest in a foreign estate or trust Any interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement with a foreign counterparty. Any option or other derivative instrument with respect to any currency or commodity that is entered into with a foreign counterparty or issuer Robert E. Ward, J.D., LL.M. All Rights Reserved 43

44 Form 8938 Statement of Specified Foreign Financial Assets Who must file? U.S. Persons who hold Specified Foreign Financial Assets exceeding Amount $50,000 on the last day of the tax year $75,000 at any time during the year $100,000 on the last day of the tax year $150,000 at any time during the year $200,000 on the last day of the tax year $300,000 at any time during the year $400,000 on the last day of the tax year $600,000 at any time during the year U.S. Person Living in the U.S. and filing separate return Living in the U.S. and filing joint return Living outside of the U.S. and filing separate return Living outside of the U.S. and filing joint returns 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 44

45 Form 8938 Due Date: Filed with Participant s U.S. Income Tax Return Statement of Specified Foreign Financial Assets Penalties: Failure to File Penalty $10,000 Continuing Failure to File Penalty for failures to file within 90 days of notice from IRS Accuracy Related Penalty Arising from underpayment of a tax related to a Foreign Financial Asset $10,000 for each 30- day period up to $50,000 40% of the understatement 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 45

46 Trusts Form 3520 Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts Purpose: Report transactions with and ownership of Foreign Trusts. Who must file? Settlors of Foreign Trusts (Part I) Owners ( Grantors ) of Foreign Trusts ( identifying on Page 1 and Part II) Beneficiaries who receive distributions from Foreign Trusts (identifying on Page 1 and Part III) Due Date: Filed with Settlor s/owner s/beneficiary s U.S. Income Tax Return Penalties: 35% of the amount transferred to the Trust 35% of the amount distributed from the Trust 5% of the assets held by the Trust (for a year in which the settlor or beneficiary is treated as the owner of the Trust) 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 46

47 Form 3520-A Annual Information Return Foreign Trust with a U.S. Owner Purpose: To provide information regarding Foreign Trusts with U.S. owners or beneficiaries. Who must file? The Foreign Trust ( Each U.S. person treated as an owner of any portion of a foreign trust under the grantor trust rules is responsible for ensuring that the foreign trust files Form 3520-A ) Due Date: 15 th day of 3 rd month after close of trust s taxable year, subject to a sixmonth extension. Penalties: 5% of the assets held by the Trust (for each year in which the settlor or beneficiary is treated as the owner of the Trust) 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 47

48 Form 8621 Return by Shareholder of a Passive Foreign Investment Company or a Qualified Electing Fund Who must file? Any U.S. Person that is a direct or indirect shareholder of a PFIC who recognizes gain on a direct or indirect disposition of PFIC stock; receives certain direct or indirect distributions from a PFIC; or is making an election reportable in respect of such PFIC. A separate Form 8621 must be filed for each PFIC in which stock is held Robert E. Ward, J.D., LL.M. All Rights Reserved 48

49 Passive Foreign Investment Companies (PFICs) Two tests determine if a foreign corporation is a PFIC Income test (IRC 1297(a)(1)): 75% or more of the gross income earned by the corporation for the taxable year is passive income. OR Asset test (IRC 1297(a)(2)): The average percentage of assets held by the corporation during the taxable year which produce passive income or are held for the production of passive income is at least 50%. (Determination is generally based on the fair market value of the assets.) 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 49

50 PFIC Result: U.S. Persons are taxable on their proportionate share of the income of the PFIC (whether or not the income is distributed) under one of three possible anti-deferral regimes. What portion of the stock of the PFIC does the U.S. Person Own? Shares owned directly and indirectly through corporations: If the U.S. Person owns 50% or more (by value) of the stock of a corporation then that person is treated as owning the proportionate value of the stock held by such corporation. 50% limitation does not apply if corporation is a PFIC. Proportionately through partnerships, trusts, and estates: Stock owned, directly or indirectly, by or through a partnership, estate, or trust considered to be owned proportionately by its partners or beneficiaries Robert E. Ward, J.D., LL.M. All Rights Reserved 50

51 PFIC The Income Test What is passive income? Dividends Interest Rents Royalties Annuities Gain from property giving rise to passive income (or no income at all) Gain from sales of interests in partnerships or trusts Other items of passive income Foreign currency gains Gains from commodity transactions Income from notional principal contracts Payments in lieu of dividends or interest 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 51

52 Form 8621 Return by Shareholder of a Passive Foreign Investment Company or a Qualified Electing Fund Exception Foreign pension funds. A United States person that is treated as the owner of any portion of a trust described in section 7701(a)(31)(B) that owns, directly or indirectly, any interest in a PFIC is not required under section 1298(f) and these regulations to file Form 8621 (or successor form) with respect to the PFIC if the foreign trust is a foreign pension fund (including a foreign pension fund that is an individual retirement plan) operated principally to provide pension or retirement benefits, and, pursuant to an income tax convention to which the United States is a party, income earned by the pension fund may be taxed as the income of the owner of the trust only when and to the extent the income is paid to, or for the benefit of, the owner. Treas. Reg T(b)(3)(ii) (Emphasis supplied.) 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 52

53 Form 8833 Purpose: Reporting of treaty-based tax return positions. Who must file? Each taxpayer who. takes the position that a treaty of the United States overrules (or otherwise modifies) the internal revenue law of the United States. IRC 6114 Penalties: Individuals: $1,000 Corporations: $10,000 Exception: Reporting on Form 8833 is waived with respect to any of the following return positions taken by a taxpayer: (iv) That a treaty reduces or modifies the taxation of income derived from pensions. Treas. Reg (c) 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 53

54 What is FATCA? Foreign Account Tax Compliance Act (Hiring Incentives to Restore Employment Act of 2010) (U.S. Public Law , 124 Stat. 71) Compliance Regime to identify U.S. persons (individuals and entities, including, corporations, partnerships, estates, and trusts that own non-u.s. accounts, assets, and businesses) Due Diligence and Reporting Registration and Withholding 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 54

55 FATCA Specified U.S. Person (Plan Participant) Retirement Plan Shareholder Plan Trust Mutual Fund Depositor Registration Due Diligence Reporting Withholding Registration Due Diligence Reporting Withholding Canada Bank of Montreal Shareholder Bank of Montreal Registration Due Diligence Reporting Withholding United States Google Microsoft Facebook 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 55

56 FATCA Incentive for Compliance: 30% GROSS withholding (No Treaty Relief) ON Interest, dividends, royalties, annuities, and other types of fixed, determinable, annual, or periodic ( FDAP ) income Sale of assets producing FDAP income Treaty-protected U.S. source business income 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 56

57 Depository Institutions FATCA Financial Institutions E.g., Banks, credit unions, and similar financial entities Custodial Institutions 20% or more of the entity s gross income for the three most recent calendar years was derived from holding financial assets Investment Entities Insurance Companies 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 57

58 FATCA What is an Investment Entity? The term Investment Entity means any Entity that conducts as a business (or is managed by an entity that conducts as a business) one or more of the following activities or operations for or on behalf of a customer: (1) trading in money market instruments (cheques, bills, certificates of deposit, derivatives, etc.); foreign exchange; exchange, interest rate, and index instruments; transferrable securities; or commodity futures trading; (2) individual and collective portfolio management; or (3) otherwise investing, administering, or managing funds or money on behalf of other persons. This subparagraph 1(j) shall be interpreted in a manner consistent with similar language set forth in the definition of financial institution in the Financial Action Task Force Recommendations. Canada U.S. IGA, Article 1(1)(j) 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 58

59 FATCA Reporting Participant Reporting Plan Reporting 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 59

60 FATCA Reporting Form W-8BEN-E 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 60

61 FATCA Exemptions Treasury Regulations Treasury Regulations (f): Exempt Beneficial Owner ( EBO ) Treaty-Qualified fund IRC 401(a) equivalent fund Broad participation fund Narrow participation fund Retirement fund investment vehicle EBO-owned fund 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 61

62 FATCA Exemptions Intergovernmental Agreement ( IGA ) Exemptions Annex II Canada IGA Retirement plan or arrangement described in paragraph 3 of Article XVIII of the Convention between Canada and the United States of America with Respect to Taxes on Income and Capital as amended ( Canada - US Tax Treaty ) Treaty retirement plan investment entities owned by one or more EBOs Deferred Profit Sharing Plans defined in ITA 147(1) 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 62

63 FATCA Exemptions Intergovernmental Agreement ( IGA ) Exemptions Annex II Accounts maintained by Canadian Financial Institutions Registered Retirement Savings Plans (RRSPs) as defined in subsection 146(1) of the Income Tax Act Registered Retirement Income Funds (RRIFs) as defined in subsection 146.3(1) of the Income Tax Act Pooled Registered Pension Plans (PRPPs) as defined in subsection 147.5(1) of the Income Tax Act Registered Pension Plans (RPPs) as defined in subsection 248(1) of the Income Tax Act Tax-Free Savings Accounts (TFSAs) as defined in subsection 146.2(1) of the Income Tax Act Deferred Profit Sharing Plans (DPSPs) as defined in subsection 147(1) of the Income Tax Act 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 63

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65 Canada Case-Study Mary Montreal was a life-long resident of Toronto who retired to Florida two years ago. She is 66 years old. Mary remains a citizen of Canada and is a lawful permanent resident of the United States ( Greencard Holder ). She has the following retirement plan assets and sources of income. In 2015 she received $5,000 in benefits from Canada s Old-Age Security System. $20,000 in benefits from Canada s Pension Plan System Robert E. Ward, J.D., LL.M. All Rights Reserved 65

66 Canada Case-Study In addition Mary was a participant in her employer s Defined Contribution Pension Plan and has an account balance of $300,000. Mary also contributed to a Registered Retirement Savings Plan ( RRSP ) and has an account balance of $100,000. Mary also contributed to a Deferred Profit Sharing Plan ( DPSP ) and has an account balance of $30, Robert E. Ward, J.D., LL.M. All Rights Reserved 66

67 Old Age Security Pension and Canada Pension Plan Benefits Benefits under the social security legislation in a Contracting State paid to a resident of the other Contracting State shall be taxable only in that other State, subject to the following conditions: (b) a benefit under the social security legislation in Canada paid to a resident of the United States shall be taxable in the United States as though it were a benefit under the Social Security Act, except that a type of benefit that is not subject to Canadian tax when paid to residents of Canada shall be exempt from United States tax. Canada US Tax Treaty Article XVIII, paragraph 5(b). Reporting: Form Robert E. Ward, J.D., LL.M. All Rights Reserved 67

68 Employer s Defined Contribution Pension Plan Taxation of Accruals: Contributions made to, or benefits accrued under, a qualifying retirement plan in a Contracting State by or on behalf of an individual who is a resident of the other Contracting State shall be deductible or excludible in computing the individual s taxable income in that other State, where: (a) the individual performs services as an employee in the first-mentioned state the remuneration from which is taxable in that State and is borne by an employer who is a resident of that State or by a permanent establishment which the employer has in that State; and (b) the contributions and benefits are attributable to those services and are made or accrued during the period in which the individual performs those services. This paragraph shall apply only to the extent that the contributions or benefits qualify for tax relief in the firstmentioned State. Canada - US Tax Treaty Article XVII, paragraph 10 For purposes of paragraphs 8 to 14, a qualifying retirement plan in a Contracting State means a trust, company, organization or other arrangement: (a) that is a resident of that State, generally exempt from income taxation in that State and operated primarily to provide a pension or retirement benefits; (b) that is not an individual arrangement in respect of which the individual s employer has no involvement; and (c) which the competent authority of the other Contracting State agrees generally corresponds to a pension or retirement plan established in and recognized for tax purposes by that other State. Canada - US Tax Treaty Article XVIII, paragraph 15 Reporting: FinCEN Form 114 Form Robert E. Ward, J.D., LL.M. All Rights Reserved 68

69 Employer s Defined Contribution Pension Taxation of Distributions: Pensions and annuities arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State, but the amount of any such pension that would be excluded from taxable income in the first-mentioned State if the recipient were a resident thereof shall be exempt from taxation in that other State. Canada - US Tax Treaty Article XVIII, paragraph 1 For the purposes of this Convention: (a) the term pensions includes any payment under a superannuation, pension or other retirement arrangement. Canada - US Tax Treaty Article XVIII, paragraph 3(a) Reporting: Form Robert E. Ward, J.D., LL.M. All Rights Reserved 69

70 Registered Retirement Savings Plan Taxation of Accruals A natural person who is a citizen or resident of a Contracting State and a beneficiary of a trust, company, organization or other arrangement that is a resident of the other Contracting State, generally exempt from income taxation in that other State and operated exclusively to provide pension or employee benefits may elect to defer taxation in the firstmentioned State, subject to rules established by the competent authority of that State, with respect to any income accrued in the plan but not distributed by the plan, until such time as and to the extent that a distribution is made from the plan or any plan substituted therefor. Canada - US Tax Treaty Article XVIII, paragraph 7 Reporting: FinCEN Form 114 Form Robert E. Ward, J.D., LL.M. All Rights Reserved 70

71 Registered Retirement Savings Plan Taxation of Distributions Pensions and annuities arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State, but the amount of any such pension that would be excluded from taxable income in the first-mentioned State if the recipient were a resident thereof shall be exempt from taxation in that other State. Canada - US Tax Treaty Article XVIII, paragraph 1. Reporting: Form Robert E. Ward, J.D., LL.M. All Rights Reserved 71

72 Deferred Profit Sharing Plan Taxation of Accruals A natural person who is a citizen or resident of a Contracting State and a beneficiary of a trust, company, organization or other arrangement that is a resident of the other Contracting State, generally exempt from income taxation in that other State and operated exclusively to provide pension or employee benefits may elect to defer taxation in the firstmentioned State, subject to rules established by the competent authority of that State, with respect to any income accrued in the plan but not distributed by the plan, until such time as and to the extent that a distribution is made from the plan or any plan substituted therefor. Canada - US Tax Treaty Article XVIII, paragraph 7 Reporting: 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 72

73 Deferred Profit Sharing Plan Taxation of Distributions Pensions and annuities arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State, but the amount of any such pension that would be excluded from taxable income in the first-mentioned State if the recipient were a resident thereof shall be exempt from taxation in that other State. Canada - US Tax Treaty Article XVIII, paragraph 1. Reporting: Form Robert E. Ward, J.D., LL.M. All Rights Reserved 73

74 74 U.S. Taxation of Beneficiaries Participating in Australian Superannuation (c) Copyright M. Robinson & Company February All Rights Reserved.

75 75 Australian Superannuation Plan: General Information Australian Objective: To help employees save money for retirement. Employer s Portion: 9.5 percent of an employee s salary and wages. Employee s Portion: Employees are permitted to make additional payments up to a limit. (c) Copyright M. Robinson & Company February All Rights Reserved.

76 Australian Income Taxes 76 Australian Tax on Contributions 15 percent; 30 percent of high earners unless contribution is made with post-tax funds. Australian Tax on Internal Earnings 15 percent on the internal build-up on investment income; 15 percent of capital gains when the fund sells an investment. Australian Tax on Distributions generally no Australian tax on distributions. ~ per Wikipedia Article. (c) Copyright M. Robinson & Company February All Rights Reserved.

77 Taxation of Employer Contributions: Australia 77 Employer Contributions Included in Income, as Vested Section 402(b)(1) (c) Copyright M. Robinson & Company February All Rights Reserved.

78 78 Taxation on Internal Build-Up of Values - Australia Employer s Portion Tax on Internal Build-Up of Income Subject to tax upon distribution under Section 72. See Section 402(b)(2) UNLESS Highly Compensated Employee. See HCE Slide. Employee s Portion Subject to Tax as Grantor Trust. Regulation 1.402(b)-1(b)(6) and Section 679 (c) Copyright M. Robinson & Company February All Rights Reserved.

79 79 Taxation on Final Distribution of Values - Australia Final Distributions Employer s Portion Subject to Reporting Under Section 72. See Section 402(b)(2). Employee s Portion Free of tax since income was previously taxed under Section 679. Basis Adjustments for Previously Reported Income. (c) Copyright M. Robinson & Company February All Rights Reserved.

80 80 U.S. Income Tax of Beneficiaries of Australian Employee s Trusts Foreign Tax Credit Issues Section 904(c). Foreign taxes can be carried back for one year and carried forward for 10 years. Unless similar income is earned during that 11 year window the foreign tax credit is lost. Section 679(a). Foreign taxes can be credited if treated as paid by the beneficiary of a Grantor trust. See, also, Section 901(b)(1) and (5). Income earned by a foreign grantor trust is taxed to the owner. (c) Copyright M. Robinson & Company February All Rights Reserved.

81 81 U.S. Income Tax of Beneficiaries of Australian Employee s Trusts Matching Issues Foreign Tax Credit Issues - Continued Contributions Taxed in Australia in year earned. Taxed in the United States in the year that the contributions vest. There may NOT be a time match. Section 904(c). Example: Earned in Australia in 2016; Vested in Foreign tax credit carryforward works. Example: Earned in Australia in 2016; vested in Foreign tax credit carryforward will NOT work. (c) Copyright M. Robinson & Company February All Rights Reserved.

82 U.S. Income Tax of Beneficiaries of Australian Employee s Trusts 82 Foreign Tax Credit Issues - Continued Foreign Taxes Paid by Trust 15 percent on the internal build-up on investment income; 15 percent of capital gains when the fund sells an investment. Portion of Foreign Taxes Allocable to Beneficiary under Section 679 (Foreign Grantor Trusts) and Section 901(b)(1) and (5). All Foreign Taxes Paid by an Employees Trust appear allocable under Section 901(b)(5). There is concern for the opaque doctrine. (c) Copyright M. Robinson & Company February All Rights Reserved.

83 Examples 83 Assumption: Australian tax on internal build-up paid by trust in Distribution in If the trust is treated as a owned by the employer, the Australian Tax is treated as paid by the trust. It is not credible unless the foreign taxes are allocated to the taxpayer under Section 901(b)(5). If the Australian income tax was paid when the employee contributed 30 percent of the assets, the trust is treated as owned by the employer and the tax is not creditable unless Section 901(b)(5) provides relief. If the Australian income tax was paid when the employee contributed 50.1 percent of the assets, the employee is treated as owning 50.1 percent of the trust assets and as having paid50.1 percent of the Australian income tax percent of the Australian tax can be carried forward unless section 901(b)(5) provides relief. (c) Copyright M. Robinson & Company February All Rights Reserved.