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Financial planning in the age of FATCA

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Financial Planning in the Age of FATCA

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Financial planning in the age of FATCA

  1. 1. Financial Planning in the Age of FATCA 10/01/2014
  2. 2. Who are we? Derren Joseph Derren Joseph, is an EA (Enrolled Agent - license # 00100858-EA) who has been admitted to practice before the IRS and is an associate member of the American Institute of CPAs (#7920958). He has a Masters in Economics from the University of Aberdeen (Scotland), a Masters in Development Studies from Middlesex University (London), a first degree in Business and holds a Certified Diploma from ACCA (Association of Chartered Certified Accountants in the UK). Derren has done work for large, listed companies as well as Small and Medium-sized Enterprises (SMEs). He also has over 15 years’ experience in financial and econometric modelling with British, American, & Caribbean companies. Derren’s experience includes Senior or Director-level roles, at companies such as British Airways, Expedia, H T Joseph CPA and Caribbean Airlines. Since 2007, Derren has been working with Americans in the Caribbean, the U.K., and Miami, FL. His specialty is working with expats with equity stakes in SMEs. Derren moved to Singapore in October 2013 to take up the role of General Manager at AETS and has had his views published by the Singapore Business Review, the International Business Structuring Association, Compliance Alert, Caribbean 360, the Guardian, and the Jamaican Observer among others. derren@expattaxUSA.com
  3. 3. This document or presentation is not intended or written to be used, and may not be used, for the purpose of avoiding penalties that may be imposed on the taxpayer.
  4. 4. Outline • US persons - Citizenship vs residency based taxation • What is it? • Impact • What exactly is FATCA • What is it? • Impact • Implications of FATCA IGA for US persons • Banks / Financial Institutions • Annual Returns / Form 8938 • US based brokerage firms • 3 points for compliance - • Point #1 – Non qualified insurance policies • Point #2 – PFICs • Point #3 – FBARs • Amnesty • Q&A
  5. 5. What is a US Person? - Citizenship vs residency based taxation • Passport holders • Permanent residents • Substantial presence • Accidental Americans • NRA spouses who make a Sec 6013g election
  6. 6. Impact – AmCham, U.S. Chamber of Commerce Survey
  7. 7. Outline • US persons - Citizenship vs residency based taxation • What is it? • Impact • What exactly is FATCA • What is it? • Impact • Implications of FATCA IGA for US persons • Banks / Financial Institutions • Annual Returns / Form 8938 • US based brokerage firms • 3 points for compliance - • Point #1 – Non qualified insurance policies • Point #2 – PFICs • Point #3 – FBARs • Amnesty • Q&A
  8. 8. • The Foreign Account Tax Compliance Act (FATCA) is codified as Chapter 4 of the Internal Revenue Code. It represents the Treasury Department's efforts to prevent U.S. taxpayers who hold financial assets in non-U.S. financial institutions (foreign financial institutions or FFIs) and other offshore vehicles from avoiding their U.S. tax obligations. • The intent behind the law is for foreign financial institutions (FFIs) to identify and report to the IRS U.S. persons holding assets abroad and for certain non-financial foreign entities (NFFEs) to identify their substantial U.S. owners. • In order to comply with the rules, FFIs are required to enter into an FFI agreement with the U.S. Treasury or comply with intergovernmental agreements (IGAs) entered into by their local jurisdictions. • U.S. withholding agents (USWAs) must document all of their relationships with foreign entities in order to assist with the enforcement of the rules. Failure to enter into an agreement or provide required documentation will result in the imposition of a 30% withholding tax on certain payments made to such customers and counter-parties. • Failure to impose the requisite withholding under FATCA requirements could result in significant financial exposure.
  9. 9. Outline • US persons - Citizenship vs residency based taxation • What is it? • Impact • What exactly is FATCA • What is it? • Impact • Implications of FATCA IGA for US persons • Banks / Financial Institutions • Annual Returns / Form 8938 • US based brokerage firms • 3 points for compliance - • Point #1 – Non qualified insurance policies • Point #2 – PFICs • Point #3 – FBARs • Amnesty • Q&A
  10. 10. Impact – Democrats Abroad Survey of 6500 Americans abroad
  11. 11. Impact – types of accounts closed
  12. 12. Impact – value of accounts closed
  13. 13. Impact – closure stateside as well
  14. 14. Impact – refusal to open accounts
  15. 15. Impact – strained relationships
  16. 16. Impact – issues with employment
  17. 17. • Further Implications of FATCA • US based brokerage firms • Banks / Financial Institutions • Annual Returns / Form 8938
  18. 18. Banks and other Financial Institutions
  19. 19. Form 8938 Penalty - Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply
  20. 20. Outline • US persons - Citizenship vs residency based taxation • What is it? • Impact • What exactly is FATCA • What is it? • Impact • Implications of FATCA IGA for US persons • Banks / Financial Institutions • Annual Returns / Form 8938 • US based brokerage firms • 3 points for compliance - • Point #1 – Non qualified insurance policies • Point #2 – PFICs • Point #3 – FBARs • Amnesty • Q&A
  21. 21. Point #1 – Non qualified insurance policies • Insurance policies can be treated as US qualified, US non-qualified or a PFIC • US qualified – if you have to ask… • PFIC – to be discussed later • US non qualified – • If underlying fund (in which the policy invests) are only available to the fund and not the general public • If policy holder doesn’t have the right to select from menu of funds • Then there should be no look-thru rule (not a PFIC)
  22. 22. Point #1 – Non qualified insurance policies • Section 7702(g) says the “income on the contract” must be reported as ordinary income. • “Income on the contract” = increase in “net surrender value” during the taxable year + “cost of life insurance” for the year – premiums paid during the year. • “Net surrender value” = cash surrender value. • “Cost of life insurance” should roughly equate to the annual insurance cost of the contract – as opposed to the investment component. • We add this annual increase to the tax basis of the policy (in addition to total premiums). • Sickness payments should reduce this basis with any excess generating income. • We track policy basis with increases for premiums and taxable increases in cash value. No loss for the years when cash value goes down. • Everything fully disclosed in attachment to return
  23. 23. Point #1 – Non qualified insurance policies • Foreign life assurance or sickness and accident policies. Must pay customs & excise tax at a rate of 1% of the premium paid per year. • This must be reported on Form 720 on a quarterly basis. • To be able to file Form 720 you will first require a Employer Identification Number . This can be obtained by completing form SS4. • Once you have your EIN you can now complete your 720 forms
  24. 24. Outline • US persons - Citizenship vs residency based taxation • What is it? • Impact • What exactly is FATCA • What is it? • Impact • Implications of FATCA IGA for US persons • Banks / Financial Institutions • Annual Returns / Form 8938 • US based brokerage firms • 3 points for compliance - • Point #1 – Non qualified insurance policies • Point #2 – PFICs • Point #3 – FBARs • Amnesty • Q&A
  25. 25. Point #2 - PFICs • Enacted in 1986 to limit tax deferral by US investors in off shore funds • Previously off shore funds had an advantage over domestic funds. No tax till distribution. • Post 1986, there is a level playing field for both domestic and off shore mutual funds. The U.S. puts the burden on the shareholder to determine their share of the income of the investment company. The tax code does not encourage U.S. persons to invest in mutual funds outside the U.S.
  26. 26. Point #2 - PFICs • To employ this punitive regime, the IRS requires shareholders of PFICs to effectively report undistributed earnings via choosing to be taxed through one of three possible methods- 1. Section 1291 fund, 2. Qualified Election Fund, and 3. Mark to Market election.
  27. 27. Point #2 - PFICs
  28. 28. Point #2 - PFICs
  29. 29. Point #2 - PFICs
  30. 30. Outline • US persons - Citizenship vs residency based taxation • What is it? • Impact • What exactly is FATCA • What is it? • Impact • Implications of FATCA IGA for US persons • Banks / Financial Institutions • Annual Returns / Form 8938 • US based brokerage firms • 3 points for compliance - • Point #1 – Non qualified insurance policies • Point #2 – PFICs • Point #3 – FBARs • Amnesty • Q&A
  31. 31. Point #3 - FBARs
  32. 32. Point #3 - FBARs
  33. 33. Point #3 - FBARs
  34. 34. Outline • US persons - Citizenship vs residency based taxation • What is it? • Impact • What exactly is FATCA • What is it? • Impact • Implications of FATCA IGA for US persons • Banks / Financial Institutions • Annual Returns / Form 8938 • US based brokerage firms • 3 points for compliance - • Point #1 – Non qualified insurance policies • Point #2 – PFICs • Point #3 – FBARs • Amnesty • Q&A
  35. 35. Q&A
  36. 36. Appendix – FATCA vs FBAR
  37. 37. Appendix – FATCA vs FBAR
  38. 38. Appendix – FATCA vs FBAR
  39. 39. Appendix – Tax Rates
  40. 40. Appendix – Obamacare Tax
  41. 41. Estimated Taxes?
  42. 42. Fixed, Determinable, Annual, Periodical (FDAP) Income
  43. 43. Effectively Connected Income (ECI)

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