The announcement by Internal Revenue Service yesterday via Revenue Procedure 2020-17 offers a big relief to many taxpayers with foreign retirement fund account or education, medical or disability trusts. Following are the salient features of the Rev. Proc.:
- The Rev Proc provides exemption from filing Forms 3520 and 3520-A for an “eligible individual’s” transactions with, or ownership of, an “applicable tax-favored foreign trust” (ATFFT)
- An eligible individual generally means an individual who is a U.S. citizen or resident and who is compliant with all requirements for filing U.S. federal income tax returns and has reported as income (to the extent required) any contributions to, earnings of, or distributions from, an ATFFT.
- ATFFT includes foreign pension or a tax favored foreign retirement trust and foreign medical, disability or educational trust or a tax favored foreign non-retirement savings trust.
- Tax favored retirement trust must be created to operate exclusively or almost exclusively to provide, or to earn income for the provision of, pension or retirement benefits.
- The trust must only permit contributions with respect to income earned from the performance of personal services.
- Contributions to the trust must: (a) be limited by a percentage of earned income of the participant, (b) be subject to an annual contribution limit of $50,000 or less, or (c) be subject to a lifetime contribution limit of $1,000,000 or less.
- Withdrawals from the trust must be conditioned upon reaching a specified retirement age, disability, or death, or penalties must apply to withdrawals made before such conditions are met. However, an exception is provided for early withdrawals for hardship or educational purposes, or for the purchase of a primary residence.
- Employer provided trusts must be non discriminatory
- Trust must be created to operate exclusively or almost exclusively to provide, or to earn income for the provision of, medical, disability, or educational benefits.
- Contributions to the trust must be limited to $10,000 or less annually or $200,000 or less on a lifetime basis
- Withdrawals from the trust must be conditioned upon the provision of medical, disability, or educational benefits, or penalties must apply to withdrawals made before such conditions are met.
Cherry on the top!
- Penalties are not applicable in case of the above trusts because ATFFT is exempt from reporting on 3520 and 3520-A
- Rev Proc also includes procedures for the eligible individuals who have been assessed penalty for failing to comply with IRC 6048, to request abatement of the penalty assessed
- Rev Proc also describes the procedure to claim refund of the previously paid penalty
This is a tremendous news for many taxpayers who have such qualifying accounts/ trusts in foreign countries. For example dual residents of U.S. and Canada who have RESP accounts will now breathe a sigh of relief.
Foreign investors are generally not subject to US tax on US source capital gain unless it is effectively connected with a US trade or business, or it is realized by an individual who meets certain physical presence requirements.
Gain from the disposition of a U.S. real property interest (USRPI), however, is treated as income effectively connected with a US trade or business under the Foreign Investment in Real Property Tax Act (FIRPTA). This FIRPTA gain is subject to tax and withholding under Code Sec. 897 and Code Sec. 1445.
Stock or a beneficial interest in a US real property holding corporation (USRPHC) is a USRPI.
Under pre-2015 PATH Act law, in the case of any disposition of a USRPI by a foreign person, the transferee was required to deduct and withhold at the rate of 10% of the amount realized on the disposition.
Effective dispositions made on or after February 16, 2016, the new PATH Act increases the FIRPTA withholding rate to 15% on the dispositions of USRPIs and other prescribed transactions.
However, the PATH Act provides for a reduced FIRPTA withholding rate of 10% in the case of a disposition of property which is acquired by the transferee for use by the transferee as a residence, and the amount realized for the property does not exceed $1,000,000, provided the exemption for a residence bought for $300,000 or less does not apply.
Few days ago Senate Finance Committee approved a Bill that would modify the FIRPTA – Foreign Investment in Real Property Tax Act. The affected foreign investors are primarily the shareholders of REIT – Real Estate Investment Trusts, however, the changes would also encompass other foreign investors in US real property.
Among other things the Bill if enacted would increase the FIRPA withholding tax under IRC 1445 from 10% to 15%. It would also impose additional reporting requirements than those exist now. For example, real estate brokers may also have a reporting requirements when they sell property owned by foreign investors!
It is important to monitor the development as it would significantly increase the burden on the withholding agents and buyers of the properties.
We at CPA Global Tax & Accounting are monitoring the developments and will post an update as soon as the Bill is finalized in its present form or with any changes. Please contact us (email@example.com) if you need additional information about the provisions of the Bill.
In a recent court case, the taxpayer who argued that by living in Germany for many years and selling his US properties a long time back, he had relinquished his Lawful Permanent Residence (LPR) or a green card and hence should not be subject to US taxes on his income. However, IRS did not accept this and court agreed with IRS making the taxpayer liable for the tax.
IRS contended that the taxpayer was liable for income tax deficiencies for 2004 and 2006 – 2009 (almost all of which was attributable to the gain on his installment sale of stock). IRS argued that (1) because the taxpayer did not formally abandon his LPR status (obtained in ’77) until 2010, he remained an LPR during the years in issue, and (2) because he was not taxable by Germany as a German resident during those years, he was not a German resident under Article 4 of the Treaty. Therefore, he was not exempted from U.S. taxation by the Treaty.
The Tax Court reasoned that the taxpayer did not formally renounce or abandon that status until Nov. 10, 2010, when he filed a Form I-407 and surrendered his green card to the USCIS consistent with the requirements of Reg. § 301.7701(b)-1(b)(3).The Court rejected the taxpayer’s argument that he “informally” abandoned his LPR status. The Court held that for Federal income tax purposes, the taxpayer’s LPR status turns on Federal income tax law and was only indirectly determined by immigration law. The taxpayer’s reliance on an immigration case that recognized “informal” abandonment was misplaced. Unlike immigration law, the Code and regs were not silent on the point at which a taxpayer’s LPR status was considered to change. The requirements set out in Code Sec. 7701(b)(6)(B), Reg. § 301.7701(b)-1(b)(1), and Reg. § 301.7701(b)-1(b)(3) for abandoning LPR status
IRS today announced that it posted the revised FATCA regulations in the Federal register for publication.
This contains the regulations coordinating chapters 3, 4, 61, and Section 3406 of the Internal Revenue Code as well as the revised final FATCA regulations.
IRS also posted on its website the revised certain FATCA Forms. These Forms were in draft form until now:
- Form 1042
- Form 8966
- Form W-8BEN
- Instructions to Form W-8BEN
- Form W-8ECI
- Instructions to Form W-8ECI
It is important to note that the foreign entity receiving the US source FDAP income should file Form W-8BEN-E and is not eligible to file W-8BEN.
Transfer pricing audit is getting a momentum and is being perceived as a big weapon in the hands of IRS for the adjustments. IRC 482 gives immense powers to IRS for adjusting income, credits and deductions of a taxpayer where it finds that a revenue is lost due to the related party transactions that were not conducted on arm’s length standard.
The IRS’s Large Business and International division has released a roadmap providing detailed guidance on transfer audits, including audit techniques and tools to assist with transfer pricing exams, as well as an estimated timeline for the exam, insights as to how the exams will be conducted, and tips for upfront planning.
The roadmap provides the key themes and acknowledges that cases are won and lost on the facts and that enforcement of the arm’s length standard requires the exercise of judgment. As a result, the roadmap encourages IRS examiners to keep an open mind during the examination and avoid “fishing expeditions” (theories in search of facts). Ultimately, the roadmap encourages IRS auditors to determine a reasonable result under the facts and to consider that the taxpayer may have the more compelling theory regarding its situation.
It must be remembered that the roadmap is not an official guidance but a working document for the auditors in planning their audits without having to consult with the Internal Revenue Manual at all times. The roadmap would be equally helpful to the taxpayers and the IRS auditors to understand the objectives and plan for the equitable outcome.
The document can be found at http://www.irs.gov/pub/irs-utl/FinalTrfPrcRoadMap.pdf.
In Osvaldo Rodriguez et ux V. Commissioner, the fifth circuit recently upheld the decision in a transaction involving inclusion of IRC 956 income with respect to the taxpayers’ Controlled Foreign Corporation (CFC) in Mexico.
Osvaldo and Ana Rodriguez, husband and wife, were citizens of Mexico and permanent residents of the U.S. They were the sole shareholders of Editora Paso del Norte, S.A. de C.V. (Editora). Editora had been incorporated in 1976 under Mexican law, and in 2001 it had established operations in the U.S. as a branch under the name Editora Paso del Norte, S.A. de C.V., Inc.—a controlled foreign corporation (CFC). On their amended 2003 and original 2004 U.S. federal income tax returns, the taxpayers included in gross income $1,585,527 and $1,478,202, respectively, for amounts of Editora’s earnings invested in U.S. property and taxable directly under IRC 951(a)(1)(B) and IRC 956.
Taxpayers treated the IRC 951 inclusions as qualified dividend income subject to preferential qualified dividend rates. IRS determined that the Code Sec. 951 inclusions were taxable at ordinary income rates.
The fifth circuit upheld the decision and ruled that the amounts included in the Rodriguez’s gross income under IRC 951(a)(1)(B) and IRC 956 with respect to their CFC’s investments in U.S. property were not qualified dividend income under IRC 1(h)(11).