Asia Pension Plan Reporting 101: How to Report to the IRS

Asian Pension Plan Reporting 101: How to Report to IRS

Asian Pension Plan Reporting 101, Common Examples

It is very common for taxpayers who are considered U.S. citizens, lawful permanent residents, or foreign nationals who meet the substantial presence test to have worked in Asia and accumulated a significant amount of foreign pension. Often, Asian employers offer a provident fund-type pension, which is similar to a 401 (k) in the United States, but with components similar to Social Security as well. While many retirement funds across different Asian countries are similar, there are distinctions depending on the particular country and pension system. In addition, depending on whether there is a tax treaty between the United States and the country offering the pension will impact how that pension is treated for U.S. tax purposes. Let’s look at some of the common types of foreign pension plans in Asia.

Two Components:  Tax and Reporting

Off the back, it is important to note that there are two components when it comes to pensions in Asia and other foreign countries. The two components include the taxation of the income associated with the pension and the reporting of the value of the pension for international information reporting purposes, such as FBAR and FATCA. As to the income tax specifically, different issues will arise depending on whether there is a treaty between the two countries (which will impact whether contributions and growth are reportable). When it comes to distributions, in general, distributions will be taxable unless the taxpayer resides in a foreign country and makes a treaty election to be treated as a non-resident alien for U.S. tax purposes (or otherwise meets an exception to the substantial presence test). *Also, the rules can differ for public vs private pension and employment vs personal pension, as well as social security equivalent ‘pension.’

Hong Kong Pension System

In Hong Kong, the Mandatory Provident Fund, or MPF, is a mandatory type of retirement plan in which both employers and employees contribute to the retirement plan. With some MPF retirement plans, employees can select which investments they would like their MPF to be invested in. There are also specific MPF programs tailored to different industries. Since there is no treaty between the United States and Hong Kong, the general rule is that the contributions made by the employer to the fund are not deductible from a U.S. tax return. In addition, growth within the fund is taxable, and the fund is required to be reported on Form 8938 and the FBAR. There are potential reporting implications for Form 3520 and 8621 as well, but oftentimes the exceptions and exclusions limit the reporting that is necessary on these additional forms.

Singapore Pension System

The two main pension systems in Singapore include CPF and SRS:

CPF (Central Provident Fund)

In Singapore, the CPF or Central Provident Fund is a mandatory retirement plan for taxpayers who are considered citizens or permanent residents of Singapore. Taxpayers have the opportunity to determine how they would like to make their investments and even allow for CPF to be used to invest in rental property.

SRS (Supplemental Retirement Scheme)

In addition to having a CPF, some Singaporeans (and even foreigners) may also have a Supplementary Retirement Scheme (SRS). The SRS is a voluntary program in which contributions are made in addition to retirement savings. The SRS is essentially a type of personal pension designed to supplement retirement, similar in concept to a Pillar 3 personal pension in countries that utilize the three-pillar systems, such as Switzerland.  Since there is no treaty between the United States and Singapore, the general rule is that the contributions made by the employer to the fund are not deductible from a U.S. tax return. In addition, growth within the fund is taxable, and the fund is required to be reported on Form 8938 and the FBAR. There are potential reporting implications for Form 3520 and 8621 as well, but oftentimes the exceptions and exclusions limit the reporting that is necessary on these additional forms.

Malaysia Pension System

In Malaysia, the Employee Provident Fund or EPF is a mandatory type of retirement plan in which employers and employees both contribute to the retirement plan. With some plans, employees have the opportunity to determine the type of arrangements they want in order to determine which investments they would like their MPF to be invested in. There are also specific programs tailored to different industries, similar to other provident funds. Since there is no treaty between the United States and Malaysia, the general rule is that the contributions made by the employer to the fund are not deductible from a U.S. tax return. In addition, growth within the fund is taxable, and the fund is required to be reported on Form 8938 and the FBAR. There are potential reporting implications for Form 3520 and 8621 as well, but oftentimes the exceptions and exclusions limit the reporting that is necessary on these additional forms.

Thailand Pension System

In Thailand, there is a voluntary retirement savings plan/provident fund, which some employers may implement to assist taxpayers with saving for retirement. Unlike other Asian countries, the Thailand Provident Fund is voluntary and not mandated for all employees. Since there is a treaty between the United States and Thailand, it will impact the taxation of fund contributions, growth, and distributions. However, even though there is a treaty, taxpayers are still required to file international tax forms such as Form 8938 and the FBAR.

Vietnam Pension System

Vietnam has two types of pensions: the compulsory social insurance portion of the pension and voluntary pension schemes. As to the compulsory pension, both employers and employees are required to contribute to these retirement plans. In addition to the compulsory pension, there are voluntary pension schemes in Vietnam, such as voluntary pension insurance and voluntary supplemental pension plans. Some are offered by Vietnamese insurance companies, and others are offered by the employer. Since there is currently a treaty between the United States and Vietnam, it will impact the taxation of fund contributions, growth, and distributions. However, even though there is a treaty, taxpayers are still required to file international tax forms such as Form 8938 and the FBAR.

Philippines Pension System

In the Philippines, the two main categories of pension plans are the government service insurance system and the Social Security system pension plans. The government service insurance system is to provide pension benefits for public sector employees, while the Social Security system pension plan provides retirement benefits for private sector and self-employed taxpayers. Depending on when the person began contributing to their pension, in addition to their age and financial situation, they may have the ability to take a large up-front payment and then receive monthly distributions thereafter. In addition, there are various types of voluntary pension plans, such as a personal equity retirement account and variable universal life insurance, to help supplement retirement. Since there is currently a treaty between the United States and the Philippines, it will impact the taxation of fund contributions, growth, and distributions. However, even though there is a treaty, taxpayers are still required to file international tax forms such as Form 8938 and the FBAR.

Japan Pension System

Japan has multiple types of pensions depending on whether it is a public or private pension and whether it is the primary pension or a supplement. National pension is mandatory for all residents of Japan between a certain age. There is also an employees’ pension which is for taxpayers who live and work in Japan — either in the public or private sector. Taxpayers in Japan would typically either invest in the national pension or the employees’ pension. In addition, there are also additional/supplemental pension schemes that taxpayers can invest in, such as a private pension. Because there is currently a treaty between the United States and Japan, it will impact the taxation of fund contributions, growth, and distributions. However, even though there is a treaty, taxpayers are still required to file international tax forms such as Form 8938 and the FBAR.

China Pension System

China’s pension system is a bit different than other Asian countries in that it is structured by the three main pillars that can be found in non-Asian countries as well. The basic pension is the first pillar and is typically for taxpayers who are employed and make contributions while they are employed. The second pillar is referred to as enterprise annuities, and it is similar in structure to a 401K plan in the United States. These types of second pillar investments are sponsored by employers, and both the employer and the employee make contributions to the fund. There is also a third pillar, which is completely voluntary, and as in most countries that offer a third pillar, the purpose is to supplement the other pension plans during retirement. Because there is currently a treaty between the United States and China, it will impact the taxation of fund contributions, growth, and distributions. However, even though there is a treaty, taxpayers are still required to file international tax forms such as Form 8938 and the FBAR.

South Korea Pension System

The main pension system in South Korea is the National Pension Scheme, which is contributed to by both employers and employees. As to the workplace-based pension scheme, typically, both employers and employees will contribute a compulsory amount. There are alternative employment schemes for individuals who are not employed (self-employed) and who contribute both as the employer and employee. Additional voluntary pension coverages and private pension opportunities (private/corporate pensions) are available as well.   Because there is currently a treaty between the United States and South Korea, it will impact the taxation of the fund contributions, growth, and distributions. However, even though there is a treaty, taxpayers are still required to file international tax forms such as Form 8938 and the FBAR.

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.