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

Transcription

1 Mastering U.S. Tax Reporting of Foreign Retirement Account Ownership and Distributions TUESDAY, FEBRUARY 2, 2016, 1:00-2:50 pm Eastern IMPORTANT INFORMATION 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 For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the 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 EVENT 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. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

3 Mastering U.S. Tax Reporting of Foreign Retirement Account Ownership and Distributions February 2, 2016 Robert E. Ward, Esq., LL.M. Ward Chisholm P.C. Morris N. Robinson, Esq., CPA, LL.M. M. Robinson & Co. Patricia Weisgerber, Esq., LL.M. M. Robinson & Co.

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 Account Ownership and Distribution I. Classification of Foreign Pensions, Annuities, and Social Security 4520 East-West Highway, Suite 650 Bethesda, Maryland Strafford February 2, 2016 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 13 What is a U.S. Qualified Retirement Plan? Compliance with Section 401, IRC, including: A trust created or organized in the United States Minimum participate 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

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 that 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).

15 15 Examples of Broad-Based Foreign Provident Funds Retirement Plans 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

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)

17 Taxation of Beneficiaries of Foreign Retirement Plans 17 > 50% Employee Contributions > 50% Employer Contributions Ownership for Grantor Trust Purposes Employee is Owner/Grantor of Portion Employee contributed. Employer is Owner of Balance of Trust Account. Regulation 1.402(b)-1(b)(6) Ownership for Employees Trust Purposes Employer is Owner of Entire Trust Regulation 1.402(b)-1(b)(6) Employer Contributions Included in Income, as Vested Section 402(b)(1) Employer Contributions Included in Income, as Vested Section 402(b)(1)

18 > 50% Employee Contributions Taxation of Beneficiaries of Foreign Retirement Plans > 50% Employer Contributions Tax on Internal Build-Up of Income Employer s Portion 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 Basis Adjustment for Reported Income Regulation 1.402(b)-1(b)(5) Tax On Internal Build-Up of Income Employer s Portion Employer is Owner of Entire Trust Regulation 1.402(b)-1(b)(6) Subject to tax upon distribution under Section 72. See Section 402(b)(2) UNLESS Highly Compensated Employee in a Discriminatory Plan. See HCE Slide. Employee s Portion N/A Basis Adjustment for Reported Income Regulation 1.402(b)-1(b)(5) 18

19 19 Taxation of Highly Compensated Employees 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)

20 Taxation of Beneficiaries of Foreign Retirement Plans (continued) > 50% Employee Contributions 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. FATCA Reporting Form 8938: Statement of Specified Foreign Financial Assets. Reporting is required by the beneficiary. > 50% Employer Contributions Final Distributions Entire Trust Subject to Reporting Under Section 72. See Section 402(b)(2) Employee s Portion Not Applicable. FATCA Reporting Form 8938: Statement of Specified Foreign Financial Assets. Reporting is required by the beneficiary. 20

21 Taxation of Beneficiaries of Foreign Retirement Plans (continued) > 50% Employee Contributions > 50% Employer Contributions Foreign Grantor Trusts Reporting Form 3520-A: Annual Information Return of Foreign Trust With a U.S. Owner must be filed by the U.S. owner of the foreign grantor trust. Foreign Grantor Trusts Reporting Not Applicable 21

22 Taxation of Beneficiaries of Foreign Retirement Plans (continued) > 50% Employee Contributions > 50% Employer Contributions Form 3520: Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Contributions to a foreign employees trust described in Section 402(b) is NOT required to be reported by the transferor, if a U.S. Person Section 6048(a)(3)(B)(ii). Contributions to a foreign grantor trust must be reported by the transferor, if a U.S. Person. Per instructions to Form Distributions to a beneficiary from any foreign trust are REQUIRED to be reported Section 6048(c). Form 3520: Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Contributions to a foreign employees trust described in Section 402(b) is NOT required to be reported by the transferor, if a U.S. Person Section 6048(a)(3)(B)(ii). N/A Distributions to a beneficiary from any foreign trust are REQUIRED to be reported Section 6048(c). 22

23 Taxation of Beneficiaries of Foreign Retirement Plans (continued) > 50% Employee Contributions > 50% Employer Contributions PFIC Rules Employer s Portion of Trust PFIC rules do NOT apply to the employer s portion of the employees trust due to the opaque doctrine for employees trusts. Regulation T(b)(3)(ii) Employee s Share of Trust. PFIC Rules APPLY. The employee is treated as owning his or her beneficial share of foreign mutual funds (PFICs) owned by the Grantor Trust Portion of the employee s trust. Section 1298(a)(3). PFIC Rules Employer is Treated as Owner of Entire Trust. PFIC Rules do NOT apply to employees trusts due to the opaque doctrine for employees trusts. Regulation T(b)(3)(ii). Employee s Share of Trust. Not Applicable. 23

24 Taxation of Beneficiaries of Foreign Retirement Plans (continued) > 50% Employee Contributions > 50% Employer Contributions Throwback Rules Employer s Portion of Trust Throwback Rules do NOT apply to employer s portion of the employees the due to the opaque doctrine. Regulation 1.641(a)-(0). Employee s Portion of Trust Throwback Rules do NOT apply because the income was taxed as earned by Grantor Trust. No undistributed net income. Section 665(a). Throwback Rules Employer Owns Entire Trust Throwback rules do NOT apply to employee s trusts due to the opaque doctrine. Regulation 1.641(a)-(0). Employee s Portion of Trust Not Applicable 24

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. Section 409A(a)(1) Nonqualified deferred compensation plans potentially include employee trusts described in Section 402(b)(1). Section 409(d)(1).

26 26 Non-Qualified Deferred Compensation Plans Section 409A Certain Foreign Plan Exceptions The term nonqualified deferred compensations plan does not apply if there is a tax treaty in place. Regulation 1.409A-1(a)(3)(i). The term nonqualified deferred compensations plan does not apply if the retirement plan is a broad-based foreign retirement plan A-1(a)(3)(v). Written arrangement Wide range of employee, substantially all are NRAs Nondiscriminatory in coverage and benefits Discourages use of plan benefits for non-retirement purposes Individual cannot eligible to participate in U.S. qualified plan Deferral is nonelective and relates to foreign earned income Section 415 limits (on benefits and contributions) apply

27 27 Non-Qualified Deferred Compensation Plans Section 409A Certain Foreign Plan Exceptions Above listing is not exhaustive. See 1.409A-1(a)(3)

28 28 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 Section 409A(a)(1)(A) Plus 20% penalty tax Section 409A(b)(5)(A) Plus interest at the underpayment rate plus 1 percent Section 409A(b)(5)(B) to the extent the compensation is not subject to a substantial risk of forfeiture and has not previously been included in gross income. Penalty also applies to increases in asset values. Section 409A(b)(4).

29 29 Income Calculations: Tax Year 2015

30 Income Calculations 30 Example 1: Foreign National/U.S. Resident Taxpayer 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 Year-end Bond Portfolio Balance: $375, Contributions: $5,000 Foreign Deferred Compensation Plan Vested Accrued Benefit: $22,500 Interest Income: $11,175 ($370,000 face value x 3% Annual Interest); ($5,000 x.015)

31 Income Calculations 31 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

32 2015 Foreign Earned Income Exclusion 32 Amount: $100,800 (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.

33 Mastering U.S. Tax Reporting of Foreign Account Ownership and Distribution IV. Information Reporting 4520 East-West Highway, Suite 650 Bethesda, Maryland Strafford February 2, 2016 Presentation By Robert E. Ward, J.D., LL.M. Ward Chisholm, P.C One Bentall Centre, 505 Burrard Street Vancouver, British Columbia V7X 1M5

34 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 34

35 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 35

36 Report of Foreign Bank and Financial Account (FinCEN Form 114) What is a financial interest in an account? a. 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.) b. Other Financial Interests: i. 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)); ii. 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)); iii. 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 iv. 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)). c. 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) Robert E. Ward, J.D., LL.M. All Rights Reserved 36

37 FBAR Due Date June 30 (No Extensions) Surface Transportation and Veterans Health Care Choice Improvement Act of 2015: April 15, subject to sixmonth extension. Applies to taxable years beginning after December 31, Robert E. Ward, J.D., LL.M. All Rights Reserved 37

38 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 38

39 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. Procedures to Ensure Consistency and Effectiveness in the Administration of Civil FBAR Penalties (Attachment 1 to Treasury Memorandum, May 13, 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. For most cases involving multiple nonwillful violations, examiners will recommend one penalty for each open year, regardless of the number of unreported foreign financial accounts. In those cases, the penalty for each year will be determined based on the aggregate balance of all unreported foreign financial accounts, and the penalty for each year will be limited to $10,000. Where there are multiple owners of an unreported foreign financial account, examiners must make a separate determination with respect to each co-owner of the foreign financial account as to whether there was a violation and, if so, whether the violation was willful or non-willful Robert E. Ward, J.D., LL.M. All Rights Reserved 39

40 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 40

41 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 41

42 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 42

43 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 43

44 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: Filed with Settlor s/owner s/beneficiary s U.S. Income Tax Return Surface Transportation and Veterans Healthcare Choice Improvement Act of 2015: 15 th day of 3 rd month after close of trust s taxable year, subject to a six-month extension. Applicable to taxable years beginning after December 31, 2015 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 44

45 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 45

46 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 46

47 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 47

48 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 48

49 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 C Corporations: $10, Robert E. Ward, J.D., LL.M. All Rights Reserved 49

50 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 50

51 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 51

52 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 52

53 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 53

54 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 54

55 FATCA Reporting Participant Reporting Plan Reporting 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 55

56 FATCA Reporting Form W-8BEN-E 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 56

57 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 57

58 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 58

59 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 59

60 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 60

61 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 61

62 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 62

63 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 63

64 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) 2016 Robert E. Ward, J.D., LL.M. All Rights Reserved 64

65 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 Reporting: Form Robert E. Ward, J.D., LL.M. All Rights Reserved 65

66 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 66

67 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 67

68 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: Form Robert E. Ward, J.D., LL.M. All Rights Reserved 68

69 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 69

70 70 U.S. Taxation of Beneficiaries Participating in Australian Superannuation

71 Australian Superannuation Plan: 71 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.

72 Australian Income Taxes 72 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.

73 Taxation of Employer Contributions - 73 Australia Employer Contributions Included in Income, as Vested Section 402(b)(1)

74 74 Taxation on Internal Build-Up of Values - Australia Tax on Internal Build-Up of Income Employer s Portion 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

75 Taxation on Final Distribution of Values 75 - 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.

76 76 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)(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.

77 U.S. Income Tax of Beneficiaries 77 of Australian Employee s Trusts Foreign Tax Credit Issues - Continued Matching Issues 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.

78 U.S. Income Tax of Beneficiaries 78 of Australian Employee s Trusts 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.

79 Examples 79 Assume: 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.

80 80 U.S. Income Tax of Beneficiaries of Australian Employee s Trusts Earned Income Exclusion Employer contributions to Employees Trust NOT SUBJECT to the earned income exclusion upon vesting. See Section 911(b)(1)(B)(iii).

81 81 U.S. Income Tax of Beneficiaries of Australian Employee s Trusts Planning Idea: Early Vesting of Employer s Contribution An employer allows a non-resident alien to vest all or a portion of the employer s contribution to his employee s superannuation account prior to becoming a U.S. Citizen. The employee s income will escape United States taxation because it was treated as received before the nonresident became subject to United States taxation. The vested property becomes part of the NRA s basis. Caution: The possible effect of early vesting on the foreign income tax liability of the taxpayer must be considered. Caution: Certain contributions made to a non-resident alien are treated as made by a U.S. Citizen. Section 679(c)(3). This affects the inclusion of income in a foreign grantor trust.

82 82 Case Study: U.S./U.K. Treatment of Retirement Income, Earnings, and Transfers

83 U.K. Pensions & Retirement Plans 83 U.S./U.K. Treaty Provisions Convention between the Government of the United States of America and the Government of the United Kingdom and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains (2001) England Scotland Wales Northern Ireland

84 U.K. Pensions & Retirement Plans 84 U.S./U.K. Treaty: Applicable Treaty Articles Article 18: Pension Schemes Article 3(1)(o): Definition of a Pension Scheme Article 17: Pension, Social Security, Annuities, Alimony, and Child Support Article 1(4) & (5): Savings Clause and Exceptions under General Scope

85 U.K. Pensions & Retirement Plans 85 U.S./U.K. Treaty: Article 18 Pension Schemes Purpose of Article 18: Pension Schemes Department of Treasury Technical Explanation: Article 18 deals with cross-border pension contributions. It is intended to remove barriers to the flow of personal services between the Contracting States that could otherwise result from discontinuities in the laws of the Contracting States regarding the deductibility of pension contributions.

86 U.K. Pensions & Retirement Plans 86 U.S./U.K. Treaty: Definition of a Pension Scheme Article 3(1)(o): Any plan, scheme, fund, trust or other arrangement established in a Contracting State which is: Generally exempt from taxation in that State; and Operated principally to administer or provide pension or retirement benefits or to earn income for the benefit of one or more arrangements.

87 U.K. Pensions & Retirement Plans 87 U.S./U.K. Treaty: Pension Scheme Components Contributions Earnings on Contributions Deductions Pension Payments/Distributions Lump-sum Distributions Transfers/Rollovers Social Security Payments

88 U.K. Pensions & Retirement Plans 88 U.S./U.K. Treaty: Article 1(4) Savings Clause Subject to the Savings Clause: Paragraph 2 of Article 17: Taxation of lump-sum payments Article 17 (2): Notwithstanding the provisions of paragraph 1) of this paragraph, a lump-sum payment derived from a pension scheme established in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in the first-mentioned State. Based on situs of the scheme; not based on where the recipient resides To prevent double non-taxations Department of TreasuryTechnical Explanation Paragraph 2 is intended to deal with a particular type of double non-taxation that arose under the prior Convention because the United Kingdom does not tax lump-sum distributions from pension plans.

89 U.S./U.K. Tax Treaty 89 Case Study Pension Scheme Rhys, a U.K. citizen, is a green card holder and works for a high-tech company near Boston, Massachusetts. Rhys s annual salary for 2015 is $70,000. He is 32 years old. Rhys is a vested participant in the U.S. company s defined contribution plan 401(k). In 2015, Rhys contributes $2,000 to his U.K. personal pension account he had established before he moved to the U.S. The personal pension is invested in a number of unit trusts. The December 31 st value of the personal pension account is the equivalent of $48,000. Rhys is also a vested participant in his former U.K. employer s defined benefit plan. In 2016, Rhys decides to accept a job offer from his former U.K. employer and moves back to Wales. He wants to transfer the balance in his U.S. defined contribution plan to his U.K. personal pension account. Discussion

90 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 (c) Copyright M. Robinson & Company February All Rights Reserved.