Foreign Tax Issues REBECCA DONEHEW
Form 5471 Information Returns of U.S. Persons with Respect to Certain Foreign Corporations Used to satisfy the reported requirements of transactions between foreign corporations and U.S. persons. Substantial penalties exist for U.S. Citizens who are liable for filing form 5471 and fail to do so. Form 5471 should be attached to the taxpayer s federal income tax, partnership or exempt organization return, and filed by the due date of that return. This includes extensions
Form 5471: Who is liable? U.S. citizens and resident alien individuals U.S. domestic corporations U.S. domestic partnerships U.S. domestic trust
Departing alien clearance Known as the sailing or departure permit Before leaving the U.S., all aliens (except for aliens not required to obtain a permit) must obtain a certificate of compliance This document must be secured from the IRS before leaving the U.S. An individual will receive this permit after filing a Form 1040C, U.S. Departing Alien Income Tax Return, or Form 2063 (U.S. Departing Alien Income Tax Statement and Annual Certificate of Compliance)
Aliens not required to obtain An individual that represents a foreign government while holding a diplomatic passport A member of the representatives household A servant who accompanies the representative An employee of an international organization or foreign government whose pay for official services is exempt from U.S. taxes and who has no other U.S. source income A member of the employee s household who was not paid by U.S. sources If an individual signed a waiver of nonimmigrants privileges as a condition of holding both your job and your status as an immigrant, this exception does not apply, and they MUST get a certificate
Aliens not required to obtain sailing or departure cont. Student, industrial trainee, or exchange visitor, or the spouse or child of such an individual To qualify, the individual must have F-1, F-2., H-3, H-4, J-1, J-2, Q-1, Q- 2, or Q-3 visa. The individual must not have received any income from sources in the United States other than Allowances covering expenses incident to their study or training in the United States (Travel, Maintenance, Tuition) Value of service or accommodations furnished incident to such study or training Income from employment authorized under U.S. immigration laws Interest on deposits, but only if the interest is not effectively connected with a U.S. trade or business
Aliens not required to obtain sailing or departure cont a student, or the spouse or child of a student, with an M-1 or M-2 visa. To qualify, you must not have received any income from sources in the United States other than Income form employment authorized under U.S. immigration laws Interest on deposits, but only if that interest is not effectively connected with a U.S. trade or buisness
Aliens not required to obtain sailing or departure cont Any of the following A person on a pleasure trip and have a B-2 visa A person on a business trip, and have a B-1 visa or a combines B-1/B-2 visa, or are present in the U.S. under Visa Waiver, and do not stay in the U.S. or any of it s possessions for more than 90 days during the tax year A person passing through the U.S or any of it s possessions, including travel on a C-1 visa or under a contract, such as a bond agreement, between a transportation line and the U.S. Attorney General A person admitted on a border-crossing identification card A person does not need to carry passports, visas, or border-crossing identification cards because they are (A) visiting for pleasure or (B) visiting for business and do not stay in the United States or any of it s possessions for more than 90 days during the tax year A person who is a resident of Canada or Mexico who commutes frequently to the U.S. to work and your wages are subject to income tax withholding A military trainee admitted for instructional under the Department of Defense and they will leave the U.S. on official military travel orders. Exception does not apply If the Area Director believes you had taxable income during the tax year, up through the departure date, or during the proceeding tax year
Aliens Required to obtain Sailing or departure permits If someone does not fall under the category Aliens not required to obtain sailing or departure permit, they must obtain a permit. To obtain, the individual must file form 1040-C or Form 2063 before leaving the United States A individual must also pay all of the tax shown due on form 1040-C along with any taxes due for past years
When to obtain a sailing departure At least two weeks before the individual plans to leave A person cannot apply earlier than 30 days before their planned departure date Do not wait until the last minute, or their will be unexpected problems!!
Sailing/Departure permit: Papers to submit Passport/Alien registration card or visa Copies of U.S. income tax returns filed for the past 2 years. If an individual was in the U.S. for less than 2 years, they need to bring the income tax returns they filed for the period Receipts for income taxes paid on those returns Receipts, bank records, canceled checks, and other documents that prove deductions, business expenses, and dependents claimed on returns A statement from the employer showing wages paid and taxes withheld from Jan. 1 of the current year to the date of departure. If selfemployed, they must bring a statement of income and expenses Proof of estimated tax payments for the past year and this year Documents showing gain or loss from the sale of personal property, including capital assets and merchandise
Sailing/Departure permit: Papers to submit Cont. Documents relating to scholarship grants or fellowship grants Documents indicating you qualify for any special tax treaty benefits claimed Document verifying the date of departure Document verifying U.S. taxpayer identification number (Social Security Number) If you are married, the individual bring the above information for their spouse
Expatriation tax This applies to US citizens who have renounced their citizenship and long-term residents who have ended their US resident status for federal tax purposes. Different rules apply according to the date upon which they have expatriated.
Expatriation on or after June 17, 2008 If the individual expatriated on or after this date, the new IRC 877A expatriation rules apply if any of the following statements apply The average annual net income for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation The net worth is $2 million or more on the data of your expatriation or termination of residency The person fails to certify on Form 8854 that they have complied with all US federal tax obligations for the 5 years preceding the date of their expatriation or termination of residency
After June 17 th, 2008: Covered expatriate A citizen will be treated as relinquishing his or her US citizenship on the earliest of four possible dates: 1. The date the individual renounces his or her US nationality before a diplomatic or consular officer of the US. 2. The date the individual furnishes to the US Department of State a signed statement of voluntary relinquishment of US nationality confirming the performance of an act of expatriation 3. The date of US Department of State issues to the individual a certificate of loss of nationality 4. The date a US court cancels a naturalized citizen s certificate of naturalization
After June 17 th, 2008: For long term residents, they cease to be a lawful permanent resident if The individuals status of having been lawfully accorded the privilege of residing permanently in the US as an immigrant in accordance with immigration laws has been revoked or has been administratively determined to have been abandoned The individual. 1. commences to be treated as a resident in a foreign country under the provisions of a tax treaty between the US and the foreign country 2. Does not waive the benefits of the treaty application to residents of the foreign country 3. notifies the IRS of such treatment on forms 8833 and 8854
After June 17 th, 2008: IRC 877A imposes a mark-to-market regime, which generally means that all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation date. Any gain arising from the deemed sale is taken into account for the tax year of the deemed sale notwithstanding any other provisions of the Code. Any loss from the deemed sale is taken into account for the tax year of the deemed sale to the extent otherwise provided in the Code, except that the wash sale rules of IRC 1091 do not apply.
After June 17, 2008 The amount that would otherwise be includible in gross income by reason of the deemed sale rule is reduced (but not to below zero) by $600,000, which amount is to be adjusted for inflation for calendar years after 2008 (the exclusion amount ). For calendar year 2014, the exclusion amount is $680,000. The amount of any gain or loss subsequently realized (i.e., pursuant to the disposition of the property) will be adjusted for gain and loss taken into account under the IRC 877A mark-to-market regime, without regard to the exclusion amount. A taxpayer may elect to defer payment of tax attributable to property deemed sold.
Expatriation after june 3, 2004 and before june 17, 2008 The American Jobs Creation Act (AJCA) of 2004 amends IRC section 877, which provides for an alternative tax regime for certain, expatriated individuals. Amended IRC 877 creates objective criteria to impose the tax on individuals with an average income tax liability for the 5 prior years of $124,000 for tax year 2004, $127,000 for tax year 2005, $131,000 for 2006, $136,000 for 2007, or $139,000 for 2008, or a net worth of $2,000,000 on the date of expatriation. In addition, it requires individuals to certify to the IRS that they have satisfied all federal tax requirements for the 5 years prior to expatriation and requires annual information reporting for each taxable year during which an individual is subject to the rules of IRC 877.
Expatriation After June 3, 2004 and before June 17, 2008 Further, expatriated individuals will be subject to U.S. tax on their worldwide income for any of the 10 years following expatriation in which they are present in the U.S. for more than 30 days, or 60 days in the case of individuals working in the U.S. for an unrelated employer. Finally, even if they do not meet the monetary thresholds for imposition of the IRC 877 expatriation tax, IRC 7701(n) provides that individuals will continue to be treated as U.S. citizens or long-term residents for U.S. tax purposes until they have notified both the Internal Revenue Service (via Form 8854) and the Secretary of the Department of State (for former U.S. citizens) or the Department of Homeland Security (for long-term permanent residents) of their expatriation or termination of residency.
Expatriation on or before June 3, 2004 The expatriation tax provisions (prior to the AJCA amendments) apply to U.S. citizens who have renounced their citizenship and long-term residents who have ended their US residency for tax purposes, if one of the principal purposes of the action is the avoidance of U.S. taxes. You are presumed to have tax avoidance as a principle purpose if: Your average annual net income tax for the last 5 tax years ending before the date of the expatriation act is more than $124,000, or Your net worth on the date of the expatriation act is $622,000 or more. If you meet either of the tests shown above, you may be eligible to request a ruling from the IRS that you did not expatriate to avoid U.S. taxes. You must request this ruling within one year from the date of expatriation. For information that must be included in your ruling request, see Section IV of Notice 97-19. If you receive this ruling, the expatriation tax provisions do not apply.
Expatriation on or before june 3, 2004 The expatriation tax applies to the 10-year period following the date of the expatriation action It is figured in the same way as for those individuals expatriating after June 3, 2004, and before June 17, 2008. Individuals who renounced their US citizenship, or long-term residents that terminated their US residency, for tax purposes on or before June 3, 2004, must file an initial Form 8854, Initial and Annual Expatriation Information Statement. Individuals who renounced their U.S. citizenship or terminated their long-term resident status for tax purposes on or before June 3, 2004, must file a Form 8854, Initial and Annual Expatriation Information Statement, and it s instructions
Foreign Currency and currency exchange rates An individual must express the amounts you report on your U.S. tax return in U.S. dollars. If an individual receives all or part of their income or pay some or all of their expenses in foreign currency, they must translate the foreign currency into U.S. dollars. How they do this depends on the functional currency. The functional currency generally is the U.S. dollar unless they are required to use the currency of a foreign country. Note: Payments of U.S. tax must be remitted to the U.S. Internal Revenue Service (IRS) in U.S. dollars.
Foreign Currency and currency exchange rates An individual must make all federal income tax determinations in their functional currency The U.S. dollar is the functional currency for all taxpayers except some qualified business units (QBUs). A QBU is a separate and clearly identified unit of a trade or business that maintains separate books and records.
Foreign Currency and Currency Exchange rates Even if you have a QBU, your functional currency is the dollar if any of the following apply. You conduct the business in dollars. The principal place of business is located in the United States. You choose to or are required to use the dollar as your functional currency. The business books and records are not kept in the currency of the economic environment in which a significant part of the business activities is conducted.
Foreign Currency and Currency Exchange rates Citizens make all income tax determinations in their functional currency. If their functional currency is the U.S. dollar, they must immediately translate into dollars all items of income, expense, etc. (including taxes), that they receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. Use the exchange rate prevailing when they receive, pay, or accrue the item. If there is more than one exchange rate, use the one that most properly reflects their income. You can generally get exchange rates from banks and U.S. Embassies. If their functional currency is not the U.S. dollar, make all income tax determinations in their functional currency. At the end of the year, translate the results, such as income or loss, into U.S. dollars to report on thier income tax return.
Currency Exchange rates An exchange rate is the rate at which one currency may be converted into another, also called rate of exchange of foreign exchange rate or currency exchange rate. Below are government and external resources that provide currency exchange rates. Note: The exchange rates referenced do not apply when making payments of U.S. taxes to the IRS. If the IRS receives U.S. tax payments in a foreign currency, the exchange rate used by the IRS to convert the foreign currency into U.S. dollars is based on the date the foreign currency is converted to U.S. dollars by the bank processing the payment, not the date the foreign currency payment is received by the IRS.
Filing requirement for U.s. transferos of property to a foreign corporation U.S. persons, domestic corporations or domestic estates or trusts must file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, to report any exchanges or transfers of property to a foreign corporation. The U.S. transferor must file the Form 926 - and the additional information required under Regulations section 1.6038B-1(c) and Temporary Regulations sections 1. 6038B-1T(c) (1) through (5) and 1.6038B-1T(d) - with their income tax return for the tax year that includes the date of the transfer.
Filing requirement for U.s. transferos of property to a foreign corporation The person could be subject to a penalty for failure to file equaling 10% of the fair market value of the property at the time of the exchange/transfer if the taxpayer fails to comply with the filing requirement. The penalty will not apply if the failure to comply is due to reasonable cause and not willful neglect. The penalty is limited to $100,000 unless the failure to comply was due to intentional disregard. Moreover, the period of limitations for assessment of tax upon the exchange/transfer of that property is extended to the date that is 3 years after the date on which the information required to be reported is provided. Persons filing Form 926 may also be required to file a FinCEN Report 114, Report of Foreign Bank and Financial Accounts ( FBAR ) (formerly TD F 90-22.1), if they have $10,000 or more in a financial account held in a foreign country during the year.
U.S. owners of a foreign trade A Form 3520-A reporting information on Foreign Trust activities is required to be filed by the 15th day of the third month following the end of the trust s tax year. As a result, Form 3520-A for a foreign trust with a tax year ending December 31, 2014 is due on March 15, 2015. Each U.S. person treated as an owner of the Foreign Trust is responsible for ensuring that the foreign trust files the Form 3520-A and that the trust annually furnishes copies of the Foreign Grantor Trust Owner Statement and the Foreign Grantor Trust Beneficiary Statement to the U.S. owners and U.S. beneficiaries. If an extension of time to file is needed, a Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, must be filed with the IRS by the due date of Form 3520-A in order for it to be considered for approval.
U.S. owners of a foreign trade Every foreign trust is required to have its own Employer Identification Number (EIN) to place in Part 1, Line 1b of Form 3520-A. You can obtain an EIN by filing Form SS-4, Application for Employer Identification Number, with the IRS. To receive an EIN by telephone, complete Form SS-4, then call the Tele-TIN unit at 267-941-1099 (not toll free). Forms SS-4, 3520-A and 7004 are to be mailed to the following address. Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409 In addition, a filing requirement may exist for Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.
Some nonresidents with U.S. assets must file estate tax returns Deceased nonresidents who were not American citizens are subject to U.S. estate taxation with respect to their U.S.-situated assets. U.S.-situated assets include American real estate, tangible personal property, and securities of U.S. companies. A nonresident s stock holdings in American companies are subject to estate taxation even though the nonresident held the certificates abroad or registered the certificates in the name of a nominee. Exceptions: Assets that are exempt from U.S. estate tax include securities that generate portfolio interest, bank accounts not used in connection with a trade or business in the U.S., and insurance proceeds.
Some nonresidents with U.S. assets must file estate tax returns Estate tax treaties between the U.S. and other countries often provide more favorable tax treatment to nonresidents by limiting the type of asset considered situated in the U.S. and subject to U.S. estate taxation. Executors for nonresident estates should consult such treaties where applicable. The Internal Revenue Service may collect any unpaid estate tax from any person receiving a distribution of the decedent s property under transferee liability provisions of the tax code.
International individual tax statistics Foreign Recipients of U.S. Income: Provides data on income paid to nonresident aliens and the amount of tax withheld by the U.S. Government. Data are taken from Form 1042-S. Foreign Recipients of U.S. Partnership Income: Provides data on the taxable income allocated by U.S. partnerships to foreign partners and the U.S. tax withheld on this income. This study is conducted annually. Data are taken from Forms 8805. Foreign Trust: Provides data on foreign trusts that have U.S. "persons" as grantors, transferors, or beneficiaries. This study is conducted every 4 years. Data are taken from Forms 3520 and 3520-A.
International individual tax statistics Individual Foreign Earned Income/Foreign Tax Credit: Provides data on foreign-source income, deductions, taxes, and foreign tax credit reported on individual income tax returns. This study is conducted every 5 years. Data are taken from Forms 2555 and 1116. International Boycotts: Provides data on the business operations of U.S. entities that participate in international economic boycotts not sanctioned by the U.S. Government. Data are taken from Form 5713. Nonresident Alien Estate Tax Returns: Provides data on estate tax returns filed for non-u.s. citizens residing abroad who owned at least $60,000 worth of property within the U.S. at time of death. This study is conducted every 2 years. Data are taken from Form 706-NA.
Internal Revenue Service International Visitors Program (IVP) The International Visitors Program (IVP): provides government officials from other countries with an opportunity to receive clear and concise briefings on the U.S. Internal Revenue Service s programs and policies The briefings, given by IRS experts, assist the foreign country with its organization, strategic goals and plans. It is not a venue for training. The IRS does NOT accept applications from non-government entities, interns, fellows, or students working on degrees or research. Applications must originate from the country s taxing authority.
Internal Revenue Service International Visitors Program (IVP) Application policies and procedures An IVP Application requesting a visit to the IRS must be in writing and sent forty-five (45) days in advance to provide enough time for the IRS International Visitors Program (IVP) Office to schedule presentations on the topics requested, identify the IRS experts who will meet with the officials, and allow the experts sufficient time to prepare the presentations. This also gives the visiting delegation the necessary time to make travel arrangements, apply for visas, etc. An application must come through appropriate government channels, and all participants must be national, state or local government officials involved in taxation. The IRS has limitations for the IVP: 1 visit per quarter - up to 4 visits per year A maximum of 6 delegates per visit 3 days with no more than 3 topics per day 9 topics maximum.
INTERNATIONAL TAX GAP SERIES Overview Departing Aliens and Sailing Permit Filing Extensions and Tax Return Preparation Assistance for Military Personnel Stationed Abroad or In a Combat Zone Filing Requirements: International Individual Taxpayers Foreign Earned Income Foreign Housing Exclusion or Deduction Foreign Tax Credit Foreign Trust Reporting Requirements Gifts from Foreign Person Moving To or From the United States Reaching Out to Americans Abroad Self-Employment Tax for Business Abroad Tax Treaties Can Affect Your Income Tax
Overview Cont. The Taxation of Foreign Pension and Annuity Distributions Taxation of nonresident Aliens U.S. Citizen Performing Services in Foreign and International Airspace U.S. Tax Withholding on Effectively Connected Income Allocable to Foreign Partners U.S. Tax Withholding on Payments to Foreign Persons Withholding of Tax on Dispositions of U.S. Real Property Interets
Departing Aliens and the Sailing Permit Before leaving the United States or any of its possessions permanently or for an extended amount of time, all U.S. resident aliens and nonresident aliens (with certain exceptions) must prove they have met all federal tax requirements. This is done by obtaining a tax clearance document, commonly called a sailing permit or departure permit, from the IRS.
Military Personnel Stationed Abroad or In a Combat Zone If you are in the military stationed abroad or are in a combat zone during the tax filing season, you may qualify for certain automatic extensions related to the filing and paying of your federal income taxes Some members of the military, such as those who serve in a combat zone, can postpone some tax deadlines. If this applies to you, you can get automatic extensions of time to file your tax return and to pay your taxes. the IRS has a dedicated web page, Tax Information for Members of the Military, which provides questions and answers on combat zone tax provisions and Publication 3, Armed Forces Tax Guide. The web page and publication includes instructions on how members can self-identify to advise the IRS of their combat zone status.
International Individual Taxpayers U.S. citizens and U.S. residents are taxed on their worldwide income. This applies whether a person lives inside or outside the United States. Foreign income must be reported on a U.S. tax return whether or not the person receives a Form W-2, Wage and Tax Statement, a Form 1099 (information return) or the foreign equivalent of those forms. Foreign source income includes but is not limited to earned and unearned income, such as wages and tips, interest, dividends, capital gains, pensions, rents, and royalties.
International Individual Taxpayers Nonresident aliens are generally subject to U.S. income tax only on their U.S. source income. They are subject to two different tax rates, one for effectively connected income, and one for fixed or determinable, annual, or periodic (FDAP) income. Effectively connected income (ECI) is earned in the U.S. from the operation of a business in the U.S. or is personal service income earned in the U.S. (such as wages or self-employment income). It is taxed for a nonresident at the same graduated rates as for a U.S. person. FDAP income is passive income such as interest, dividends, rents or royalties. This type of income is taxed at a flat 30% rate, unless a tax treaty specifies a lower rate.
International Individual Taxpayers Generally, a foreign corporation must file a U.S. tax return if it is engaged in a trade or business in the United States, whether or not it had income from that trade or business. It must also file if it had income, gains, or losses treated as if they were effectively connected with a U.S. trade or business, and if it had income from any U.S. source (even if its income is tax exempt under an income tax treaty or code section).
What Should You Do If You Have Not Filed Your Tax Returns? Taxpayers should file all tax returns that are due, regardless of whether or not full payment can be made with the return. Depending on an individual s circumstances, a taxpayer filing late may qualify for a payment plan. All payment plans require continued compliance with all filing and payment responsibilities after the plan is approved. For taxpayers living abroad and/or with offshore accounts, refer to the Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers 2014 for more details on a program for taxpayers who come forward voluntarily and report their previously undisclosed foreign accounts and assets.
Foreign Earned Income Exclusion United States citizens and resident aliens are taxed on their worldwide income, whether the person lives inside or outside of the United States. However, qualifying U.S. citizens and resident aliens who live and work abroad may be able to exclude from their income all or part of their foreign salary or wages, or amounts received as compensation for their personal services. In addition, they may also qualify to exclude or deduct certain foreign housing costs. A common misconception that contributes to the international tax gap is that this potentially excludable foreign earned income is exempt income not reportable on a US tax return. In fact, only a qualifying individual with qualifying income may elect to exclude foreign earned income and this exclusion applies only if a tax return is filed and the income is reported.
Foreign Housing Exclusions or Deducations If you are a United States citizen or a resident alien, you are taxed on your worldwide income, whether you live inside or outside of the United States. However, if you live and work abroad, you may be able to exclude all or part of your foreign earnings and, in addition, may qualify to exclude or deduct a foreign housing cost amount. The Foreign Earned Income Exclusion page includes the general rules for qualifying and claiming the exclusion of foreign earned salary, wages, or other compensation received for personal services
Foreign Tax Credit Foreign tax credits allow U.S. taxpayers to avoid or reduce double taxation. You may choose to take a deduction for foreign taxes paid instead of choosing a credit. In most cases, it is to your advantage to take foreign income taxes as a tax credit.
Foreign Trust Reporting Requirements Although there are legitimate reasons why a U.S. person might create a foreign trust, or have transactions with a foreign trust, they can have tax consequences and result in filing responsibilities as well. Regardless of your motivation, failure to meet these reporting and filing requirements can result in very significant penalties. General Rules In general, the reporting rules apply to a U.S. person who: Creates a foreign trust Transfers any money or property to a foreign trust Receives a distribution from a foreign trust Is treated as the U.S. owner of a foreign trust.
Foreign Trust Reporting Requirements Reporting Requirements and Tax Consequences: Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, and Instructions. Who must file Form 3520? There are several situations in which a Form 3520 (or statement with similar information) is required to be filed. The most common circumstances are where a U.S. person: Creates or transfers money or property to a foreign trust Receives (directly or indirectly) any distributions from a foreign trust Receives certain gifts or bequests from foreign entities
Foreign Trust Reporting Requirements Income Tax Consequences: U.S. owner of a foreign trust - In general, the U.S. owner of a foreign trust is taxed on the income of that trust. A U.S. person is treated as the owner of a foreign trust under the grantor trust rules of Internal Revenue Code sections 671-679, which includes someone who transfers assets to a foreign trust which has a U.S. beneficiary of any portion of the trust. *Each U.S. owner should receive a Foreign Grantor Trust Owner Statement (Form 3520-A, page 3), which includes information about the foreign trust income they must report. U.S. beneficiary of a foreign trust In general, the U.S. beneficiary of a foreign trust will report their share of foreign trust income to the extent it is not reported by the transferors to the trust under the grantor trust rules. The U.S. beneficiary should receive a Foreign Grantor Trust Beneficiary Statement (Form 3520-A, or a Foreign Non Grantor Trust Beneficiary Statement which includes information about the taxability of distributions they have received and foreign trust income they must report. U.S. transferor of assets to a non grantor foreign trust - Internal Revenue Code section 684 requires the recognition of gain on certain transfers of appreciated assets to a foreign trust. See the Instructions for Form 3520-A for additional information.
Foreign Trust Reporting Requirements Compliance issue: Citizens and residents of the United States are taxed on their worldwide income. To help prevent the use of foreign trusts and other offshore entities for tax avoidance or deferral, Congress has enacted several specific provisions in the Internal Revenue Code. Some provisions trigger recognition of gains that would otherwise be deferred. Others deny deferral of tax on income moved offshore. A specialized industry has developed in attempting to circumvent these provisions. The promoters of offshore schemes often advance technical arguments which purport to show that their scheme is legal. These arguments are used to provide some comfort to their clients, who are then induced to enter into a scheme which usually involves concealing the true ownership and control of assets and income. The filing and reporting responsibilities discussed here also apply to the beneficial owners of foreign trusts as well. The term beneficial ownership applies to the true owner of an entity, asset, or transaction as opposed to any stated ownership provided in documents or oral representations. The beneficial owner is the one that receives or has the right to receive proceeds or other advantages as a result of the ownership. It is common practice in offshore financial secrecy jurisdictions to interpose entities, individuals, or both as stated owners. The beneficial or true owner is contractually acknowledged in side agreements, statements or by other devises.
Gifts from Foreign Person General Rule: Foreign Gifts In general, a foreign gift is money or other property received by a U.S. person from a foreign person that the recipient treats as a gift or bequest and excludes from gross income. A foreign person is a nonresident alien individual or foreign corporation, partnership or estate. The IRS may re-characterize purported gifts from foreign partnerships or foreign corporations as items of income that must be included in gross income. Additionally, gifts from foreign trusts are subject to different rules than gifts other foreign persons. A gift to a U.S. person does not include amounts paid for qualified tuition or medical payments made on behalf of the U.S. person.
Gifts from Foreign Person Reporting Requirement: You must file Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, if, during the current tax year, you treat the receipt of money or other property above certain amounts as a foreign gift or bequest. Include on Form 3520: Gifts or bequests valued at more than $100,000 from a nonresident alien individual or foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) Gifts valued at more than $15,601 for 2015 (adjusted annually for inflation) from foreign corporations or foreign partnerships (including foreign persons related to the foreign corporations or foreign partnerships).
Gifts from Foreign Person: Reporting Requirements You must aggregate gifts received from related parties. For example, if you receive $60,000 from nonresident alien A and $50,000 from nonresident alien B, and you know or have reason to know they are related, you must report the gifts because the total is more than $100,000. Report them in Part IV of Form 3520. Treat gifts from foreign trusts as trust distributions you report in Part III of Form 3520. File Form 3520 separately from your income tax return. The due date for filing Form 3520 is the same as the due date for filing your annual income tax return, including extensions. You file an annual Form 3520 for all reportable foreign gifts and bequests you receive during the taxable year. See the Instructions for Form 3520 for additional information. Under a new law effective June 17, 2008, gifts from individuals who ceased to be a U.S. citizens or green card holders (lawful permanent residents) on or after June 17, 2008 may be subject to special rules. Refer to the 2008 Instructions for Form 3520 for additional information.
Moving to or from the U.S. NOTIFY THE IRS IF YOU OWN PROPERTY IN THE U.S. If a taxpayer moves to or from a territory and has worldwide income of more than $75,000 that year, it is necessary to file Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession, with the Internal Revenue Service (IRS). If married, the $75,000 threshold applies to each spouse separately.
Moving to or from the U.S. Determining Bona Fide Residency in a U.S. Territory Bona fide residents (BFR) may be citizens, resident aliens or nonresident aliens of the U.S. In general, a bona fide resident means an individual who satisfies: Presence Test No tax home outside the U.S. territory during the tax year. No closer connection to the U.S. or a foreign country than to the U.S. territory during the tax year.
Moving to or from the U.S. Certain days count as days present in the relevant U.S. territory, even if the taxpayer was not physically present in the U.S. territory. These days include: days spent outside the U.S. territory for qualified medical reasons for the taxpayer or a family member whom the taxpayer accompanies, days outside the U.S. territory because a disaster prevented the taxpayer from being in the U.S. territory, or days spent outside the U.S. territory due to a mandatory evacuation.
Moving to or from the U.S. Also, certain days spent in the U.S. do not count as days of presence in the U.S. for the purposes of the presence test. These include: days the taxpayer spends less than 24 hours while traveling between two places outside the U.S, days the taxpayer is in the US. as a professional athlete to compete in a charitable sports event, days the taxpayer is temporarily present in the U.S. as a full time student, and days the taxpayer is in the U.S. serving as an elected representative of a U.S. territory, or serving full time as an elected or appointed official or employee of the government of the U.S. territory or its political subdivisions.
Moving to or from the U.S. Filing Income Tax Returns Once the residency status and the source of each item of income received during the tax year is known, the taxpayer is ready to identify any U.S. and/or U.S. territory filing requirements. It may be necessary to file income tax returns with more than one jurisdiction, e.g., the U.S. and the U.S. territory. Generally, the same rules that apply for determining U.S. source income also apply for determining U.S. territory source income. There is a table in Publication 570 showing the general rules for determining U.S. source income
Self-Employment Tax for Buisnesses Abroad If you are a self-employed U.S. citizen or resident, the rules for paying self-employment tax are generally the same whether you are living in the United States or abroad. The self-employment tax is a social security and Medicare tax on net earnings from self-employment. You must pay self-employment tax if your net earnings from self-employment are at least $400.
Self-Employment Tax for Buisnesses Abroad Nonresident Aliens Nonresident aliens are not subject to self-employment tax. However, selfemployment income you receive while you are a resident alien is subject to self-employment tax even if it was paid for services you performed as a nonresident alien. Effect of Foreign Earned Income Exclusion You must take all of your self-employment income into account in figuring your net earnings from self-employment, even income that is exempt from income tax because of the foreign earned income exclusion. Services for Foreign Government or International Organizations For U.S. citizens, the income paid for services rendered to a foreign government or international organization is reportable as self-employment income on their U.S. federal income tax returns, and is subject to selfemployment tax to the extent such services are performed within the United States.
Self-Employment Tax for Buisnesses Abroad International Social Security Agreements The United States has entered into social security agreements with foreign countries to coordinate social security coverage and taxation of workers employed for part or all of their working careers in one of the countries. These agreements are commonly referred to as Totalization Agreements. Under these agreements, dual coverage and dual contributions (taxes) for the same work are eliminated. The agreements generally make sure that social security taxes (including selfemployment tax) are paid only to one country. If your self-employment earnings should be exempt from foreign social security tax and subject only to U.S. self-employment tax, you should request a certificate of coverage from the U.S. Social Security Administration, Office of International Programs. The certificate will establish your exemption from the foreign social security tax. You can get more information about the Totalization Agreements on the Social Security Administration's web site.
Tax Treaties Affecting Income Tax The United States has income tax treaties with a number of foreign countries. Under these treaties, residents of foreign countries are taxed at a reduced rate or exempt from U.S. income taxes on certain items of income received from sources within the U.S. Because treaty provisions are generally reciprocal (apply to both treaty countries), a U.S. citizen or resident who receives income from a treaty country may also be taxed at a reduced tax rate by that foreign country. While tax treaties may reduce U.S. tax for nonresidents and foreign tax for U.S. residents and citizens, each treaty must be reviewed to determine eligibility for these provisions. This article provides some highlights about tax treaties and how to properly apply their provisions.
Tax Treaties Affecting Income Tax Saving Clause Most tax treaties have a saving clause that preserves the right of each country to tax its own residents as if no tax treaty were in effect. Thus, once you become a resident alien of the U.S., you generally lose any tax treaty benefits that relate to your U.S. income. However, many tax treaties have an exception to the saving clause that may allow you to claim certain treaty benefits even if you are a U.S. citizen or resident. Nonresident Aliens For nonresident aliens, treaties limit or eliminate U.S. taxes on various types of personal services and other income, such as pensions, interest, dividends, royalties, and capital gains. Many treaties limit the number of years you can claim a treaty exemption. For students, apprentices and trainees, the limit is usually four to five years. For teachers, professors and researchers, the limit is usually two to three years. Once you reach this limit, you may no longer claim the treaty exemption. In some cases, if you exceed the limit, the income is taxed retroactively for earlier years. Treaties may also have other requirements to be eligible for benefits. Publication 901, U.S. Tax Treaties, provides a summary of these treaty provisions.
Tax Treaties Affecting Income Tax U.S. Citizens and Residents U.S. citizens and residents generally will not be able to reduce their U.S. tax based on treaty provisions due to the saving clause. However, those who are subject to taxes imposed by a treaty partner are entitled to certain credits, deductions, exemptions and reductions in the rate of taxes paid to that foreign country. These treaty benefits are generally only available to residents of the U.S. They generally are not available to U.S. citizens and resident aliens who do not reside in the U.S. Foreign taxing authorities sometimes require certification from the U.S. government that an applicant filed an income tax return as a U.S. resident, as part of the proof of entitlement to the treaty benefits. Form 8802, Application for United States Residency Certification, must be filed to obtain this certification.
Tax Treaties Affecting Income Tax Disclosing Treaty Benefits Claimed If you claim treaty benefits that override or modify any provision of the Internal Revenue Code, and by claiming these benefits your tax is or might be reduced, you must attach a fully completed Form 8833, Treaty-Based Return Position Disclosure, to your tax return. There are exceptions to this requirement for certain types of income that are outlined in Publication 519, U.S. Tax Guide for Aliens, under the section on Reporting Treaty Benefits Claimed.
Tax Treaties Affecting Income Tax Competent Authority Assistance If you are a U.S. citizen or resident alien, you can request assistance from the U.S. competent authority if you think that the actions of the U.S., a treaty country or both caused or will cause a tax situation not intended by the treaty between the two countries. You should read any treaty articles, including the mutual agreement procedure article, that apply in your situation. The U.S. competent authority cannot consider requests involving countries with which the U.S. does not have a treaty. Refer to Competent Authority Agreements and Competent Authority Assistance for information on existing competent authority agreements and how to make a competent authority request. Obtaining Copies of Tax Treaties To view the text of a specific tax treaty, go United States Income Tax Treaties - A to Z. You will find the text of each treaty, and in most cases, the Technical Explanation for the treaty. The Technical Explanation provides more detail on the intent of the treaty language. Remember that tax treaties are updated periodically and amended by protocols, so be sure to check for the latest information on specific treaties when claiming treaty benefits.
The Taxation of Foreign Pension and Annuity Distributions A foreign pension or annuity distribution is a payment from a pension plan or retirement annuity received from a source outside the United States. You might receive it from a: foreign employer trust established by a foreign employer foreign government or one of its agencies (including a foreign social security pension) foreign insurance company foreign trust or other foreign entity designated to pay the annuity Just as with domestic pensions or annuities, the taxable amount generally is the Gross Distribution minus the Cost (investment in the contract). Income received from foreign pensions or annuities may be fully or partly taxable, even if you do not receive a Form 1099 or other similar document reporting the amount of the income.
The Taxation of Foreign Pension and Annuity Distributions General Rule: Treaties Pension/Annuity Articles As a general rule, the pension/annuity articles of most tax treaties allow the country of residence (as determined by the residency article) to tax the pension or annuity under its domestic laws. This is true unless a treaty provision specifically amends that treatment. Some treaties, for example, provide that the country of residence may not tax amounts that would not have been taxable by the other country if you were a resident of that country. In some cases, government pensions/annuities or social security payments may be taxable by the government making the payments. There also may be special rules for lump-sum distributions. You need to look at each treaty carefully.
The Taxation of Foreign Pension and Annuity Distributions If you live in a foreign country and receive a pension/annuity paid by a U.S. payor, you may claim an exemption from withholding of U.S. Federal Income Tax (FIT) under a tax treaty by completing Form W- 8BEN and delivering it to the U.S. payor. You must report your U.S. Taxpayer Identification Number (TIN) on Form W-8BEN for it to be valid for treaty purposes. If you live in the USA and receive a pension/annuity paid by a payor from a foreign country, you must claim your desired treaty withholding exemption on the form, and in the manner specified by the foreign government. If the foreign government, and/or the foreign withholding agent, refuses to honor the treaty claim, make the treaty claim on your income tax return, or other prescribed form, filed with the foreign country. Additionally, you may be able to claim a Foreign Tax Credit on your U.S. federal individual income tax return for any foreign income tax withheld from your foreign pension or annuity.
The Taxation of Foreign Pension and Annuity Distributions When deciding whether a tax treaty applies, identify your tax residency (Article 4 under most treaties). Then find out if the relevant treaties have articles which deal with pensions, annuities, government payments or social security payments. Remember each tax treaty is unique -- just because one treaty allows a certain treatment does not mean another treaty will allow the same treatment. Your residency determines how treaty articles on pensions and annuities will be applied. Use the domestic laws of each country to identify your residency, IRC 7701(b) in the case of the USA (Green Card Test and/or Substantial Presence Test). If, after applying the domestic law of each country, you are a resident of both countries, apply the Tiebreaker Rules: In which country do you have a Permanent Home available to you? With which country do you have closer personal and economic relations? In which country do you have an Habitual Abode? Of which country are you a National?
The Taxation of Foreign Pension and Annuity Distributions Foreign Social Security Pensions Most income tax treaties have special rules for social security payments. In many cases, foreign social security payments are taxable by the country making the payments. Unless specified otherwise in an income tax treaty, foreign social security pensions are generally taxed as if they were foreign pensions or foreign annuities. Unless a tax treaty allows it (see, e.g., the USA-Canada treaty), they are not eligible for exclusion from taxable income the way a U.S. social security pension might be.
The Taxation of Foreign Pension and Annuity Distributions Foreign Employer Contributions If you worked abroad, your Cost might include amounts contributed by your employer that were not includible in your gross income. This applies to contributions made either: before 1963 by your employer for that work, after 1962 by your employer for that work if you performed the services under a plan that existed on March 12, 1962, or after 1996 by your employer on your behalf if you were a foreign missionary (a duly ordained, commissioned, or licensed minister of a church or a lay person).