Do Funds Held within a UK SIPP Require Form 8621/PFIC?
Do Funds Held within a UK SIPP Require Form 8621/PFIC?
It is not uncommon for U.S. taxpayers in the UK to have a SIPP (Self-Invested Personal Pension). For some taxpayers, they have a SIPP because they invested in their own personal pension plan (as a retirement supplement) when they were younger, and for other taxpayers they may have previously been employed by a UK company and are no longer employed by that company and the pension has been transferred over to a SIPP. The United States and the UK have a very robust tax treaty when it comes to pension plans and one common concern is whether taxpayers who have mutual funds and other ETF’s contained within their SIPP are required to report this on Form 8621. Luckily, taxpayers may be able to rely on the PFIC pension treaty exception as promulgated in the regulations and explain below.
PFIC Reporting is Complicated
One of the most misunderstood aspects of international forms reporting involves the annual disclosure requirements for PFIC (Passive Foreign Investment Companies). In general, PFICs are reported on Internal Revenue Service Form 8621. Unlike the FBAR and Form 8938, the requirements for reporting PFIC can get infinitely complicated – especially in any year that the US Person Taxpayer may have generated excess distributions. Adding to the complexity is the fact that when a Taxpayer has ownership of various investment funds, such as foreign Mutual Funds, ETFs and SICAVs – these are also considered PFIC and therefore may require significant reporting of information that the Taxpayer may not be able to obtain.
Luckily, for some Taxpayers who have their foreign investment funds in a Pension and it is with a Treaty County where there is a Treaty dealing with PFIC – the Taxpayer may escape Form 8621 reporting. Let’s take a brief look at the limitation on PFIC pension fund exception Under US Tax Treaty.
PFIC Exception Under Section 1.1298-1 Section 1298(f)(c)(4)
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Exception for PFIC stock held through certain foreign pension funds.
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A shareholder who is a member or beneficiary of, or participant in, a plan, trust, scheme, or other arrangement that is treated as a foreign pension fund (or equivalent) under an income tax treaty to which the United States is a party and that owns, directly or indirectly, an interest in a PFIC is not required under section 1298(f) and these regulations to file Form 8621 (or successor form) with respect to the PFIC interest if, pursuant to the applicable income tax treaty, the income earned by the foreign pension fund may be taxed as the income of the shareholder only when and to the extent the income is paid to, or for the benefit of, the shareholder.
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Key PFIC Pension Exception Requirements
In order to qualify for this exception, it is important to note the following:
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The foreign investment is considered a PFIC;
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The wrapper or investment pension type qualifies as a foreign pension (or equivalent);
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There is an income tax treaty in place which identifies the PFIC/Treaty exception; and
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The income may only be taxed when paid to, or for the benefit of, the shareholder
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Late Filing Penalties May be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and/or 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.
Late-Filing Disclosure Options
If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.
*Below please find separate links to each program with extensive details about the reporting requirements and examples.
Streamlined Filing Compliance Procedures (SFCP, Non-Willful)
The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.
Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)
Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.
Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)
Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.
Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)
Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.
Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)
Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.
IRS Voluntary Disclosure Procedures (VDP, Willful)
For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).
Quiet Disclosure
Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.
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.
*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.
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.