US Taxation of Provident Funds & IRS Reporting Compliance

US Taxation of Provident Funds & IRS Reporting Compliance

Is Provident Fund Income Taxable in the U.S.?

The Provident Fund /Social Security system is a very common type of retirement plan found primarily in Asian countries across the globe. Some of the more common types of provident funds include:

• • • Singapore CPF

    • Malaysian EPF

    • Hong Kong MPF

    • Thailand TPF

    • India EPF

From a U.S. tax perspective, even though a Provident Fund is a hybrid between retirement and Social Security, it is considered to be pension and not social security. Thus, a Provident Fund will be taxed the same way that a foreign pension plan is taxed in the United States. There are some layers of complexity to the taxation of foreign provident funds depending on whether it is a treaty country such as Thailand (in which some tax deferral may be available) or a non-treaty country such as Singapore, Malaysia, or Hong Kong. With the CPF for example, many years ago the Internal Revenue Service issued multiple memoranda targeting the Singaporean CPF specifically — providing that income relating to the CPF is generally taxable and does not receive tax-deferred treatment similar to how a treaty country pension may receive tax-deferred treatment, such as the UK. Let’s walk through the basics of foreign pension plan reporting and how provident funds may be impacted under the US tax system.

First, Treaty or Non-Treaty Country?

One very important preliminary factor to consider is whether the pension is in a treaty country or a non-treaty country — since this can significantly impact the tax rules. If the pension is in a non-treaty country then the general rule is that the pension is taxable even during all phases of contribution, growth, and distribution because there is no specific rule that exempts foreign pension income in a non-treaty country from U.S. taxation. 

Contributions vs. Growth vs. Distributions

Presuming that the pension is in a non-treaty country, there are three main components to a foreign pension plan. There are the contributions that are made to the plan, the growth within the plan, and distributions out of the plan.

Foreign Employer Provident Fund Contributions

When a person is considered a US person and they are working for a foreign employer and that employer is making pre-tax contributions to the provident fund, unfortunately, these pre-tax contributions are still taxable in the United States period since there is no tax treaty in place and thus there is no specific rule that exempts pre-tax contributions from the employer. 

Foreign Employer Provident Fund Growth

Throughout the life of the provident fund, oftentimes there will be growth within the fund. There are many ways the fund can grow such as interest income generated from the bank accounts, investments in dividends and other stock that generates annual income, or possibly other forms of income such as a CPF in which the taxpayer may withdraw money out of their CPF to purchase a home and used the home as a rental property that generates ‘CPF’ income as well. All these types of income are taxable during the growth phase because there is no specific rule that exempts US income tax on the growth in non-treaty country funds.

Foreign Employer Provident Fund Distributions

Whether or not there is a treaty in place, the general rule is that distributions are taxable. When there is a treaty in place, oftentimes if those distributions are from a Public Pension, then it is only taxable at source. Without a treaty, the income is considered taxable. Noting, there can be some complexity because oftentimes at least a portion of the provident fund was accumulated before the person was a US person but that may require some forensic accounting if even accepted by the IRS which can cost in the tens of thousands of dollars for taxpayers seeking to try to parse out the distinction between what may have been basis before becoming a U.S. person as distribution versus what is considered income generated on the pension from when the Taxpayer became a US person.

International Reporting Forms

In addition to including the foreign pension on a tax return for tax purposes, there is also the international information reporting component which can be very complicated. Below please find some of the more common international information reporting forms to consider when determining whether the foreign pension should be reported for U.S. tax purposes.

FBAR Due Date and Extension

The FBAR is used to report foreign bank and financial accounts to the US Government. The Form is due on April 15, but is currently on automatic extension. Therefore, if you did not file the FBAR (FinCEN Form 114) by April 15, you still have until October to file it. And, you do not have to file an extension form such as Form 4868 or 7004 to obtain the FBAR extension — because the extension is automatically granted.

Form 8938 Due Date and Extension

Form 8938 is used to report foreign assets to the IRS in accordance with FATCA (Foreign Account Tax Compliance Act). It is similar (but not identical) to the FBAR. Form 8938 is filed with your tax return and is due when your tax return is due. If you are an individual filing a Form 1040, then the Form 8938 would be due in April along with your 1040 tax return — but if you extend the time to file your tax return, then your Form 8938 will go on extension as well.

Form 3520 Due Date and Extension

Form 3520 is used to report foreign gifts and foreign trust information. The due date for Form 3520 is generally April 15, but taxpayers can obtain an extension to file Form 3520 by filing an extension to file their tax return for that year. Similar to Form 8938, there is no specific Form 3520 extension form required beyond requesting an extension of the underlying tax return.

Form 3520-A Due Date and Extension

Form 3520-A is used to report US ownership of a Foreign Trust. Unlike Form 3520, Form 3520–A is usually due in March and not April. In addition, the rules for filing an extension for Form 3520-A are different as well (subject to the substitute filing rules). To extend the due date to file Form 3520-A, the taxpayer must file a separate Form 7004 extension form.

Form 5471 Due Date and Extension

Form 5471 is used to report the ownership of certain foreign corporations. The filing date is the same as when a person’s tax return is due — and if the taxpayer files an extension for the underlying tax return, Form 5471 will go on extension as well. In recent years, Form 5471 has become infinitely more complex — so taxpayers should be cognizant of the different filing requirements and plan accordingly.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file or report their income and file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.