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.
Foreign Account Tax Compliance Act (FATCA) come into force from January 1, 2013 when financial institutions worldwide must report US owners’ names to the IRS. Australia’s Financial Services Council (FSC) has expressed concerns that the Australian financial services industry will be unable to comply with the proposed regulations. The FSC has conveyed this to US Treasury seeking relief. It appears US Treasury is open and receptive to these concerns.
The FATCA provisions will require Australian foreign financial institutions, including superannuation funds, to collect detailed information on their members in order to determine whether an individual member’s financial and residency arrangements make them a US taxpayer. If a member is a US taxpayer, the FATCA regime requires the fund to report this information to the IRS. However, if the account holder does not provide the necessary information the fund will be required to withhold a 30% tax on US – connected payments for that member.
Nonresident alien (NRA) athletes and entertainers performing independent personal services or participating in the U.S. and embassy and consulate employees in the U.S. can expect more enforcement and litigation, an IRS official said May 12.
Speaking at the American Bar Association Tax Section meeting in Washington, Lindsey D. Stellwagen, Special Counsel International, Office of Chief Counsel said that although there had been a lot of publicity on IRS measures to enforce compliance on U.S. persons with offshore wealth, her agency is also stepping up enforcement of NRAs and resident aliens (e.g. green card holders) that owe U.S. tax. She discussed the IRS programs pertaining to athletes and entertainers and the embassy project.
Foreign athletes and entertainers may pose a challenge to IRS enforcement because they come into the U.S. for a brief period of time, earn a lot of money, then leave. Such persons may be able to evade paying tax on their U.S.-source income and enforcement may be futile if they money earned has exited the U.S. without the imposition of withholding at source.
Nonresident alien entertainers or athletes performing independent personal services or participating in athletic events in the U.S. are generally subject to a 30 percent withholding on gross income. Stellwagen explained that under the central withholding agreement (CWA) program, such persons may be subject to reduced withholding provided that certain requirements are satisfied. The agreement is entered into by the NRA athlete or entertainer, a withholding agent and the IRS and is valid for a specific tour or series of events. Withholding is based upon the budget provided and estimated net profits.
CPA Global Tax & Accounting PLLC can assist athletes and entertainers with the CWA program and work with the IRS to minimize the exposures.
Indian Finance Minister presented budget in the parliament yesterday. Along with many proposals that may affect international investors, he proposed some significant changes for the Indian residents owning foreign assets as well – reminds us of US style reporting requirements!
Accordingly, a resident taxpayer, who has any asset (including financial interest in any entity) located outside India or has signing authority in any account located outside India, is required to furnish a return of income. This amendment is proposed to be effective from FY 2011-12.
- In case of taxpayers having asset outside India, the existing time limit of four and six years for reopening assessment (where income has escaped assessment) has been increased to 16 years.
- In case of a person who is treated as an agent of the Non Resident, the time limit for issuing reassessment notice has been extended to six years from two years.
- The time limit for completion of assessment and reassessment is extended by three months.
The IRS is aggressively using intelligence gathered from the agency’s Offshore Voluntary Compliance Program to study the movement of undisclosed funds abroad and to deter tax avoidance, an IRS official said February 18.
“When [taxpayers] come in and tell us about their offshore account in one bank in one country, they may tell us about another account in another bank in another country and about the bankers they used,” said Rebecca Sparkman, Acting Executive Director Investigations and Enforcement Operations Division of the IRS at the American Bar Association Section of Taxation meeting in San Diego. “As you can imagine we start looking at all that intelligence and it points the way for the next criminal investigation.”
Although her comments had undertones of the recent indictment of Wegelin & Co., Switzerland’s oldest private bank, she declined to speak directly on any specific matter. The bank has been charged with aiding tax offenders move their undisclosed accounts from UBS.
“We want to assure you that we are reviewing all the information that comes in from your clients to match up [and provide direction on] where we should look next,” she said.
She cautioned practitioners to be fully truthful when bringing their clients into compliance.
“Please be fully, fully truthful,” she told the audience. “Because there may be those folks that are tempted to only disclose that account in that one bank that they think we know about in that one country because they think we don’t know about [an account] somewhere else. But guess what? They come in, they come through the whole program, we get their name on a list for some other bank, some other country, all bets are off! Now they are facing criminal investigation because they were not fully truthful.”
Sparkman stressed that the time to come forward with all offshore account information is at the time a voluntary disclosure is made, not subsequently.
“When you walk in the door, that is the time to be fully truthful,” she said. “Don’t be hiding anything else.”