Foreign Retirement Plans Seen Scrutinized in U.S. Effort: Taxes

A U.S. tax crackdown is coming for foreign retirement plans.

The U.S. has been pushing banks and individuals to report overseas assets, making it tougher to hide money abroad with new rules and penalties rolling out under the 2010 Foreign Account Tax Compliance Act, known as Fatca. The next wave of scrutiny will cover retirement accounts, Bloomberg BNA reported.

“The retirement community has been a little slower to catch up,” said Russell E. Hall, a senior consultant at Towers Watson.

Foreign retirement plans generally must agree to report their U.S. account holders to avoid a 30 percent withholding tax on U.S.-sourced interest, dividends and proceeds from the sale of securities beginning July 1. Global companies with programs overseas will need to catalog their funded retirement plans to figure out which ones may be exempt, Hall said.

The congressional Joint Committee on Taxation estimated in 2010 that the law would generate $8.7 billion in tax revenue over 10 years. It’s also spurring a spate of agreements between countries to bolster exchanges of information on bank accounts.

The law requires foreign banks to turn over information to the IRS about their U.S.-owned accounts or potentially face withholding taxes. Under the aegis of Fatca, the U.S. has signed a series of agreements for government-to-government information exchange -- a phenomenon that is gaining momentum in the world of tax administration. Negotiations are in the works with as many as 80 other nations.

Many retirement plans may be exempt under these intergovernmental agreements and separate exemptions that the Treasury Department and the Internal Revenue Service, said Andrew D. Bloom, an associate at Dechert in New York.

‘Helpful Exceptions’

“There are a number of helpful exceptions contained in the regulations,” Bloom said. If there is an agreement between the U.S. and the location where the retirement plan is treated as a resident, there may be additional exceptions, he said.

Some items still may not be exempt. Whether the exemptions outlined in the final rules will apply to offshore deferred compensation plans or to offshore equity-based compensation will depend on specifics of the arrangements, Bloom said.

Foreign retirement and compensation plans that fail to qualify for exemption generally must register with the IRS and either comply with the rules of an intergovernmental agreement with the Treasury Department or enter into a “foreign financial institution” agreement and report U.S. account holders, he said.

The IRS opened an online registration site Aug. 19. Foreign financial institutions must register by April 25, 2014, for inclusion on a list to be published for the first time in June 2014 and updated monthly, the IRS said.

Modified Rules

The intergovernmental agreements essentially modify the general requirements of the regulations, Bloom said. They provide a list of entities, including certain retirement plans, to be exempted or deemed compliant, he said.

Under the rules, financial institutions formed under the laws of the U.S. territories generally are treated as “foreign,” Bloom said. Some, such as U.S. Virgin Island pension funds, may be eligible for treatment as nonfinancial foreign entities, so compliance with Fatca will be relatively easy, he said.

Determining whether Fatca exemptions will apply to specific offshore deferred compensation and equity-based compensation will require more work, said Andrew L. Oringer, a partner in the New York office of Dechert.

“It won’t be one-size-fits-all. It won’t be an easy answer,” Oringer said.

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