Pillsbury Winthrop Shaw Pittman

Deadlines coming for multinationals’ retirement plans and US taxpayers with foreign financial interests

By James P Klein and Susan P Serota

In 2010, the US enacted a sweeping change in enforcement of its tax laws on foreign financial interests, the Foreign Account Tax Compliance Act (FATCA). The main thrust of the act is to penalise foreign financial institutions (FFIs), including foreign retirement plans, that fail to properly disclose US taxpayers having an interest in the institution’s various funds. In addition, the Financial Crimes Enforcement Network (FinCen) has recently replaced Form TD-F-9022.1 with a new Form 114, which must be filed electronically to report a financial interest in or signature authority over a foreign financial account (FBAR) by US persons if the aggregate value of the person’s foreign financial accounts exceeds $10,000 (£6,000) at any time during a calendar year.

FATCA is having a global impact on compliance with US tax laws. While the underlying rules of US taxation have not changed, FATCA has proven to be extremely effective in bringing many foreign governments into much more serious compliance efforts by adopting either new tax information exchange agreements with the US or the newly established FATCA intergovernmental agreements (IGAs), or both. As we reported in 2012, Internal Revenue Service (IRS) regulations have confirmed that foreign retirement plans are considered to be foreign financial institutions.

The enforcement mechanism for FATCA is a new 30 per cent withholding tax on US source investments of FFIs, including investments of foreign retirement plans. The tax applies not just on dividends, but on the gross proceeds of the plan’s US investments and not just on the US taxpayer participant’s interest in the plan, but rather on the plan’s total US source income. Paying agents will start withholding on 1 July 2014, unless given notice that the recipient foreign retirement plan is in compliance with FATCA…

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