This question has been asked several times in our practice. A recent IRS Chief Counsel Advice discusses the issue and provides the answer.
Facts.The taxpayer, a UK resident, was a university professor who contributed to UK pensions scheme, qualified under UK law, over the course of his working life. The UK pension scheme was a qualified scheme for UK tax purposes.
Taxpayer accepted a position at a U.S. university where he taught from Date 1 through Date 3. After Date 3, the taxpayer permanently moved back to the UK.
Upon returning to the UK, the taxpayer sought to rollover his US pension contributions to his UK. scheme. To that end, the US pension plan issued a lump-sum check in the amount of his US pension contributions payable to the taxpayer’s UK plan. The following year, the taxpayer received a Form 1099-R (Distribution from Pension, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.)
Issue. The question presented in the memo is whether the taxpayer could rely on the parenthetical language in Article 18(1) to make a tax-deferred rollover distribution from a U.S. pension scheme to a UK pension scheme that is not an “eligible retirement plan” under IRC 402. The memo also addressed whether the lump-sum transfer from a US pension scheme to a U.K. pension scheme is taxable as a distribution in the US under Article 17(2).
Rollover did not satisfy US Internal Revenue Code Sec. 402 requirements. Chief Counsel said that the parenthetical language referenced by the taxpayer in Article 18(1), provided that a transfer of earnings from one pension scheme to another would not be treated as a distribution if the transfer qualified as a rollover. The language, however, did not create an independent basis for treating a transfer as tax deferred rollover distribution. To qualify as a tax-deferred rollover, the rollover would have to satisfy the requirements under the domestic laws of both the transferor and transferee pension scheme.
In this case, the memo found that the rollover did not satisfy US requirements because the UK pensions scheme is not an eligible plan as described under IRC 402. The failure to satisfy the IRC 402 requirements rendered Article 18 inapplicable making the distribution taxable under Article 17(2).
Switzerland and Japan are the latest additions to the list of countries that agreed to cooperate with US Treasury.
Treasury said on June 21, that the U.S. had signed separate joint statements with Japan and Switzerland to intensify cooperation in combatting international tax evasion by removing legal impediments to compliance with the Foreign Account Tax Compliance Act (FATCA). The approach taken under the joint statements with Japan and Switzerland permits foreign financial institutions (FFIs) to report information directly to the IRS, which is different from an earlier approach that called for FFIs to report information directly to their governments that would ultimately be shared with the U.S. on an automatic exchange of information basis.
The announcement expands the list of countries already cooperating with Treasury to implement FATCA. Treasury said in February it was negotiating with France, Germany, Italy, Spain and the U.K. (the so-called G5) to establish government-to-government information sharing arrangements. (See International Taxes Weekly, 02/14/2012). In April, Treasury also announced that Ireland had entered into discussions with Treasury regarding an intergovernmental approach to implementing FATCA.
Treasury’s joint statement with France, Germany, Italy, Spain and the U.K. envisages a two-step approach whereby FFIs report FATCA-required information to their own governments and then the governments exchange the information with the U.S. on an automatic basis.
Treasury’s separate joint statements with Japan and Switzerland contemplates the mutual intent to pursue a second model framework for intergovernmental cooperation, a senior Treasury official said. Under the second model for inter-governmental cooperation, FFIs would report information directly to the IRS to the extent permitted under the FFI’s domestic laws. Where consent is necessary and not granted by the account holder, the governments would then be able to obtain such information pursuant to a treaty request.
Last week IRS updated the FAQs on its website regarding reporting on Form 8938 and added few more questions. Few noteworthy clarifications are:
- Tangible assets held for investment (e.g., art, antiques, jewelry, and cars) do not have to be reported.
- Safe deposit box is not a financial account.
- The omission of Form 8938 with the original return requires an amended return to be filed with the form attached.
- Filing of Form 8938 does not remove the requirement to file Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts), if otherwise required.
- Directly held precious metals, such as gold, are not specified foreign financial assets. Note, however, that gold certificates issued by a foreign person may be a specified foreign financial asset that you would have to report on Form 8938, if the total value of all your specified foreign financial assets is greater than the applicable reporting threshold.