There is a welcome provision under the newly enacted Act signed by President Obama this afternoon. There are various exceptions to the inclusion of subpart F income. A significant one was the CFC look-through rule which expired on December 31, 2009. Under this rule, dividends, interest, rent and royalties received or accrued from a related CFC are not treated as foreign personal holding company income(FPHCI) and hence not subject to inclusion in taxpayer’s income currently. This rule generally applies only to the extent attributable to income that is not subpart F income and not effectively connected income.
The expired provision is now reinstated for calendar years 2010 and 2011.
I have often noticed that the expats who come to work in US do not believe that their foreign pension accruals are taxable in US. Below article points out the traps for such expatriates who fail to report them to IRS particularly after the enactment of FATCA under the HIRE Act:
“Many expats that do not work for a US based company are failing to report pensions they are accruing from the overseas companies they are working for. They often disregard the pension because they incorrectly assume that it is not taxable in the US.
However, the vast majority of foreign pension plans are not considered to be qualified by the IRS. Consequently, these foreign pension plans do not enjoy any tax mitigation – the plans are taxable.
The IRS has very rigorous regulations for plan reporting and for the criteria to be a qualified plan, and thus foreign employers rarely seek such plan qualification. Compounding the problem is that most financial professionals are rarely asking their clients with foreign employers “Do you have a foreign pension that contributions are being made to?”
Because of this mistaken belief that such foreign pension plans are to be treated like those in the US, many expats are incorrectly reporting their income net of any pension contributions.
Before FATCA (the Foreign Account Tax Compliance Act of 2010) the pension contributions were generally not being reported to the IRS, thus they were incorrectly escaping taxation on US returns. The goal of FATCA is to substantially capture information on the number of these accounts and many other foreign account types turning that information over to the IRS. The act puts onerous penalties on financial institutions that do not report accounts that are in the names of US citizens and other US taxable persons.
Any foreign institution that does not agree will be subject to a thirty percent withholding rate on payments made to it. Because of the penalties and the general move toward cross border reporting in financial transactions, the IRS will be receiving a large amount of information on these previously unreported accounts. The act also requires individuals to disclose any foreign accounts with a balance that exceeds $50,000. Failure to do so may result in an initial fine of $10,000 plus additional penalties.” – Advisorfyi.com
Seek professional advice as soon as possible if you have foreign pension as the law is becoming effective in 2012.
During a speech in Washington, D.C. at the 23rd Annual Institute on Current Issues in International Taxation (I had attended the last one when the first program was mulled at), IRS Commissioner Doug Shulman indicated that the Offshore Voluntary Disclosure Program that ended on October 15, 2009 to encourage the account holders of Swiss bank UBS and other foreign banks to come forward and disclose their account holdings to the IRS was a huge success.
“We had approximately 15,000 voluntary disclosures from individuals who came in before the special VDP program ended last year,” he said. “And since the special program closed, we have received an additional 3,000 voluntary disclosures from individuals with bank accounts from around the world…..” IRS is closing the chapter on the UBS affair, but it has been “scouring the vast quantity of data” received from applicants to the voluntary disclosure program and from other sources. “Although more data mining is still to be done, this information has already proved invaluable in supplementing and corroborating prior leads, as well as developing new leads, involving numerous banks, advisors and promoters from around the world, including Asia and the Middle East.”
Shulman indicated that IRS is seriously considering another such program, however with a difference. “Taxpayers will not get the same deal as those who came in under the original program. To be fair to those who came in before the deadline, the penalty – and thus the financial cost to participate – will increase. Let me say too that we expect to make the terms of any new program available to those who have already come in after October 2009 when that program expired. Stay tuned for more details as they become available.”
Indian government amended the Provident Funds Scheme in October 2008 to extend its applicability to International workers. The provisions related to withdrawals from the Provident Fund (PF) accounts were, until recently, the same as that applicable to domestic employees. International workers had therefore no restriction to withdraw the balance available at their credit in the PF account immediately when they completed assignment in India. The government has now amended the scheme. According to the amended law, PF withdrawals are allowed only upon attainment of 58 years of age. The pension rules have also been amended. PF is the Indian version of social security.
The Education Jobs and Medicaid Assistance Act enacted on August 10, 2010 added section 909 to the Code. Notice 2010-92 addresses the application of section 909 to foreign income taxes paid or accrued in taxable years of a section 902 corporation beginning on or before December 31, 2010. The term “§902 corporation” is defined in §909(d)(5) to mean a foreign corporation with one or more domestic shareholders that meets the ownership requirements of §902(a) or (b). §902 provides for deemed paid credit in cases where domestic corporation owns 10 percent or more of voting stock of foreign corporation.
The Notice addresses situations where foreign income taxes have been separated from the related income. Section 909(a) provides that if there is a foreign tax credit splitting event with respect to a foreign income tax paid or accrued by a taxpayer, such tax shall not be taken into account for federal tax purposes before the taxable year in which the related income is taken into account by the taxpayer.