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Foreign Account Tax Compliance Act (FATCA) Can Entrap Foreign Nationals on Temporary Assignment in the U.S. Resulting in Hugh Penalties-As Well As Some U.S. Expatriates

In March, 2010 Congress passed the Hiring Incentives to Restore Employment Act (HIRE) which, in general, was intended to do exactly what the title said, restore employment through hiring incentives with the unstated intention of stimulated a depressed U.S. economy. However included in HIRE was an amendment to the U.S. Tax Code by adding Section 6038D, Information With Respect to Foreign Financial Assets, known as Foreign Account Tax Compliance Act (FATCA) which, in an attempt to close the international tax gap, imposed onerous requirements both on foreign financial institutions (FFIs) as well as U.S. persons (including business entities) required to file a U.S. income tax return.

The Impact on Non U.S. individuals Residing and Working in the U.S. and Foreign Owned U.S. Companies with Specified Foreign Financial Interests

This article is written for the purpose of raising awareness and not intended to go into details or deep discussion of FATCA, however it is of paramount importance that these issues be considered and addressed by those affected by these new rules as the penalties for non compliance could be extremely punitive.

Foreign Owned U.S. Companies

Many foreign owned U.S. companies can be affected in at least two ways. First, most have trainees, executives and other employees who are either temporarily or permanently assigned to work in the U.S. and need to inform these employees of FATCA requirements. Second, it is not uncommon for U.S. companies that are owned by foreign persons (including corporations) to either either maintain a foreign financial account or in some cases transfer excess funds on a temporary basis to a foreign account held in the name of the foreign parent (owner). In such cases the U.S. company may loan money to the foreign parent which is then held in a foreign bank account. Although the U.S. company may not have title to this foreign bank account, if it has a financial instrument documenting the loan to the foreign parent, this could indeed be considered a specified foreign financial asset subject to the requirements under FATCA. Furthermore, in such a case I would consider the possibility of the foreign parent company being considered as a deemed foreign financial institution and thereby unintentionally being subject to the FATCA rules pertaining to registration, reporting and withholding, etc. pursuant to the FFI rules.

Non U.S. individuals Residing and Working in the U.S.

Should a foreign national person be assigned to work in the U.S. and due to the substantial presence or green card rules (or if they ultimately acquired U.S. citizenship), and were subject to U.S. income tax requirements to file as a U.S. tax resident, they too would be subject to the FATCA rules pertaining to including Form 8938 with their U.S. tax returns beginning with 2011. These rules may also pertain to an "unintended" U.S. citizen such as a child who is born in the U.S. but who's parents were both non U.S. persons.

Frequently a non U.S. person who is assigned to the U.S. subsidiary or affiliate will maintain a financial account in their home country. Accordingly, should they be required to file as a U.S. resident, they would need to determine the aggregate account balances in those foreign accounts and if in excess of the limits based on their U.S. filing status, they may be required to file Form 8938. Often the family of a foreign national assigned for a year or two to the U.S. will remain in the home country  and the employee will file a resident return as married, filing separately. Thus, their Form 8938 filing threshold is only $50,000, however special rules pertain to jointly held accounts which need to be considered.

Foreign Pensions

Although the foreign employee working in the U.S. may not have an account balance in excess of the required filing threshold, there is one financial asset that I believe is critical not to overlook and that is their vested pension fund through their foreign employer. Regardless of if the employee works on the payroll of the foreign employer or the transferred to the payroll of the U.S. company, they may very likely have a vested pension fund with the foreign employer and that alone could cause them to be subject to FATCA reporting and the filing of Form 8938 especially when added to any foreign bank deposits they may have. They may also be required to file Form TDF 90-22.1 Report of Foreign Bank Accounts (FBAR).

U.S. Expatriate Employees-Past and Present

This problem can not only exist regarding non U.S. persons employed in the U.S., it can also exist for many U.S. persons who either are or did in the past reside outside the U.S. and worked for a foreign company where they may have vested in their pension fund and the balance exceeds the specified amount to require filing. Take for example an American citizen who is resides and works (or has in the past) in a foreign country. Where they may have returned to the U.S. several years prior (or continue to do so) and are entitled for a pension from the foreign employer when they retire, this must be included in the Form 8938 as well as their FBAR (Form TDF 90-22.1) if required.

 

 

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