Financial planning in the age of FATCA

Financial Planning in the Age
of FATCA
10/01/2014

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

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.

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

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

Impact – AmCham, U.S. Chamber of Commerce Survey

• 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.

Impact – Democrats Abroad Survey of 6500 Americans abroad

Impact – types of accounts closed

Impact – value of accounts closed

Impact – closure stateside as well

Impact – refusal to open accounts

Impact – strained relationships

Impact – issues with employment

• Further Implications of FATCA
• US based brokerage firms
• Banks / Financial Institutions
• Annual Returns / Form 8938

Banks and other Financial Institutions

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

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)

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

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

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.

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.

Fixed, Determinable, Annual, Periodical (FDAP) Income

Effectively Connected Income (ECI)

Financial planning in the age of FATCA

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