US Tax of Singapore CPF, Assets, & Income: IRS Compliance

US Tax of Singapore CPF, Assets, & Income: IRS Compliance

US Tax of Singapore CPF, Assets, & Income

U.S. Tax of Singapore CPF, Assets, & Income: International Tax Law is hard. This is especially true when it involves foreign pensions. That is because in their home country, foreign pensions are treated similar to a 401K, and are generally tax exempt. When it comes to Singapore and the United States tax treatment of the CPF, the difficulty is compounded by the fact that:

  • There is no bilateral tax treaty between the U.S. and Singapore
  • There is no totalization agreement between the U.S. and Singapore
  • The IRS issued memoranda identifying both CPF Contributions and Growth as taxable (even if non-distributed)

We will summarize the IRS CPF tax compliance rules and offshore reporting requirements below for you.

CPF (Central Provident Fund)

The CPF (Central Provident Fund) has 3 main components to it:

  • Tax on Contributions and Growth
  • IRS Foreign Reporting Amnesty Options

CPF & U.S. Tax

When it comes to the U.S. taxation of the CPF, the IRS issued previous memoranda on this issue and determined the following:

–Deferred salary contributions into the CPF ‘fund’ are taxed now, and not deferred.

– Accrued, non-distributed growth within the fund is taxed as well.

How is CPF Taxed in Singapore?

As provided by the IRAS in Singapore:

Employer Contributions

-Compulsory CPF Contributions relating to employment in Singapore: Not Taxable

-Voluntary CPF Contributions relating to employment in Singapore, i.e. amount in excess of compulsory contributions to be made by employer: Taxable

-Contributions made from 1 Jan 2004 relating to employment outside Singapore: Not Taxable since the contribution is a foreign-sourced income

-Contributions relating to Director’s Fees: Taxable

Voluntary CPF Contributions

Employers may also make voluntary CPF contributions to an employee’s CPF account.

Voluntary CPF contributions made by the employer relating to employment in Singapore are taxable. The employer must prepare Form IR8S if there is excess CPF contributions made in the current year and give the form to the employee.

If the excess employer’s contributions have been brought to tax and the employer has claimed or is claiming a refund, the employee should forward the completed Form IR8S to IRAS. IRAS will then review the employee’s assessment accordingly.

CPF Withdrawals

Generally, CPF withdrawals are not taxed. There are various rules, exceptions, etc. involving:

  • How old the person is taking the withdrawal?
  • How much is the withdrawal?
  • is the person still a Singaporean Citizen or Resident?
  • What the purpose of the withdrawal?
  • What portion remains for retirement?

Is CPF the Same as 401?

Not really, but kind of, sort of.

It has components of Social Security and components of a retirement (such as a 401K).

As to retirement, such as a 401(k), it is important to note the  compulsory 401k is not mandatory.

While it is typically a good idea to max out your 401(k), you are not required to do show no matter who your employer is or where you live.

On the other hand, if you are working in Singapore, the the contributions to the CPF are compulsory. 

If you do not work in Singapore (and there are some other more complex rules involving whether you work for a foreign employer, or Singaporean employer) then you do not have to contribute to the CPF.

For example, since Singapore does not allow dual-citizenship, if you are a Singaporean citizen residing in United States as a Legal Permanent Resident or Visa Holder and earning income in the United States from a U.S. employer, then no contributions from the US employer would go to the CPF.

Example of Retirement – 401K

David is a US person who works for a U.S. company. 

This company defers $10,000 each year of David’s salary into his 401(k). 

That $10,000 is eliminated from David’s tax for the current year.

Instead, at a future date when David’s retirement kicks in and he begins taking withdrawals, he will be taxed on the withdrawals at that time.

Purpose: Presumably, David is at a higher tax bracket during his working years versus retirement years, and therefore he will be taxed at a lower tax rate at withdrawal.

Is CPF the Same as U.S. Social Security?

No, not really. 

U.S. social security contributions are relatively simple.

Employees contribute a certain portion to social security as does the employer.

If you are self-employed, you pay both shares.

You don’t pay Social Security taxes on earnings greater than the annual cap. 

When a person reaches a certain age, they begin receiving social security payments and the age in which a person begins taking social security can vary.

A person can typically elect to begin receiving U.S. Social Security at different ages, and then based on the total income received by the person, that will determine whether a portion or all of their social security is taxed (when a person earns less additional income, then less of the social security is taxed, and vice versa).

Comparing CPF vs U.S. Social Security

– Social Security is a defined benefit; CPF ROI (Distributions) will vary based on investment type and value of the fund.

– CPF has various designated accounts for different purposes; Social Security is a single monthly payment.

– You may be able withdraw the a majority of  CPF balance in one withdrawal (or in full under limited circumstances)

– A CPF has a set amount of money (based on earnings) per person that can be withdrawn in full, U.S. Social Security does not; it is a continued benefit.

– A CPF has an account number, specific to the individual, social security does not.

– You cannot choose the fund for investments or investment strategy for Social Security, but you can for a CPF (many different types of investment strategies and risks).

Examples of U.S. Tax on Singaporean CPF

Here are four (4) c0mmon examples of U.S. tax issues involving Singaporean CPF.

Non U.S. Person (Employment Deferrals)

Michael is a Singaporean citizen who resides in Singapore. 

While residing in Singapore he works for a Singaporean company and the company defers money into the CPF each year.

The money is allocated into various different accounts within the CPF, and then grows just as a 401(k) would grow.

Michael (absent certain exceptions) is not able to access that money during his working years but will be able to access the money upon retirement (or other milestone).

Of course, Michael is a non-U.S. person with not U.S. Income, so the IRS cannot tax him at all on the income.

U.S. Person (Employment Deferrals)

David is a U.S. citizen and Singaporean Resident who resides in Singapore. 

While residing in Singapore he works for a Singaporean company and the company defers money into the CPF each year.

The money is allocated into various different accounts within the CPF, and then grows just as a 401(k) would grow.

The IRS taxes the deferred income; it is not exempt for U.S. Tax.

This is true, even though (absent certain exceptions) David not able to access that money during his work years.

Non U.S. Person (Growth within the Fund)

If a person is in non-US person, then there will be no impact from a US tax perspective; in other words, the IRS would have no business being involved in an non-US person’s non-US retirement.

The fund would grow over the lifetime of the investment and then when it is time to retire, the individual can take certain withdrawals.

U.S. Person (Growth within the Fund)

Unfortunately, if the employee is a US person and there is growth within the fund,  then the IRS will tax the growth within the fund.

For example, if Brian has a CPF that generated $6,000 in passive income, then Brian will pay tax on the growth — even though he is not withdrawing the money, and even though he would most likely avoid paying any Singaporean tax at that time.

CPF FBAR & FATCA (and Common Misconceptions)

CPF Is reportable on the FBAR and 8938, and can also be required on various other forms as well.

Here are some common misconceptions

CPF is just like retirement, so it doesn’t need to be reported.

Retirement Reporting

The rules regarding reporting foreign retirement, investments, and other types of accounts are very clear.

The FBAR and other reporting forms are not limited to just bank accounts.

It includes all different types of financial accounts and there is no specific exclusion for retirement accounts. Therefore, simply because you have not accessed your CPF does not mean you do not have to report it.

FATCA agreement says you don’t have to report it.

The FATCA Agreement Says I Do Not Have to Report

Some FATCA agreements exclude certain types of reporting.

Primarily it is the foreign government/entity that doesn’t have to report it, not the U.S. person.

Therefore, if you are a U.S. person, then you are required to report the CPF (if it otherwise meets the threshold reporting requirements).

You didn’t withdraw any income, so you don’t have to report it.

My CPF Didn’t Distribute any Income

Just because you didn’t receive or “touch” any income, does not have any impact on the reporting aspect of the CPF.

In fact, if you have a CPF account, chances are you are earning income, even if you are not withdrawing the income (see above analysis).

Nevertheless, even if it wasn’t earning any income, that does not impact whether or not you have to report it; you do have to report it.

It is Government mandated, so it doesn’t need to be reported.

A CPF is Government Mandated

Just because you are required to contribute to a CPF, (and just because the government may be exempt from reporting the CPF) does not impact reporting; you still have to report it.

It’s just like US Social Security ,and doesn’t need to be reported.

It is Social Security and Non-Taxable

See above analysis regarding Social Security, but since it has a definitive amount of money, and an assigned account number — it would have to be reported.

Which International Reporting Forms do I Report CPF on?

FBAR (FinCEN 114)

The FBAR is used to Report Foreign Bank and Financial Accounts on an annual basis.

The form has a relatively low threshold requirement of $10,000.

In other words, if you have an annual aggregate total of foreign accounts (including life insurance or retirement funds) that on any day of the year exceeds $10,000, then you are required to report this form.

It does not matter if the money is in one account or spread over numerous accounts.

And, it does not matter if the account is in your home country of citizenship or if you opened the account before relocating to the United States.

When it comes to the FBAR, one of the main concerns are the FBAR Penalties.

FBAR Penalties

A penalty for failing to file FBARs. United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year.

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5).

Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation, but that may be mitigated.

Form 8938

Form 8938 is a byproduct of FATCA (Foreign Account Tax Compliance Act).

It is a form that is required to be filed with the tax return each year when a person meets the threshold requirements for filing.

Unlike the FBAR, which is an electronic form which is submitted directly to the Department of Treasury (The FBAR is not submitted with your tax return), Form 8938 is part of your tax return.

Form 8938 requires you to provide extensive information regarding foreign accounts and specified foreign assets.

Form 8938 Penalties

Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D.

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

Schedule B, Foreign Accounts

In almost all situations, if a person has ownership, joint ownership, an interest in, or signature authority over a foreign account (yes, accounts from your home country are considered “Foreign”) the individual will have to mark “Yes” on Schedule B.

This is true, even if you do not meet the FBAR filing threshold, and/or the Form 8938 (FATCA) threshold filing requirement. Schedule B is not asking you how much; rather, it is just asking whether you have any ownership or signature authority over any foreign accounts.

Form 8621

IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund) is an IRS Form required to be filed by individuals who have any interest in a Passive Foreign Investment Company — whether or not they received an Excess Distribution, as long as they are not otherwise exempt from filing.

Unlike IRS Form 5471, there is no minimum ownership requirement.

 Technically, even if you have “fractional ownership,” of a PFIC you are still required to file — unless you meet one of the very limited exemptions/exclusions.

Moreover, the mere ownership of Foreign Mutual Funds and other foreign passive investments (that you do not technically own in a PFIC company) requires you to file the form.

The form can be daunting, especially when the filer also has a tax liability in accordance with form 8621.

Form 8621 Penalties

Notwithstanding Excess Distribution calculations, the “main non-numerical” penalty associated with form 8621 is completely unfair (you can read here about the sheer horror of the “Excess Distribution calculation“).

Why? Because technically, while there is no specific numerical penalty included regarding non-filing of Form 8621, a tax return is still considered to be “open” until the 8621 is filed.

In other words, the statute of limitations countdown for the IRS to audit your tax return (usually 3 years) does not even begin to tick if the 8621 hasn’t been filed.

Even if you try to argue the return only remains open as to the 8621, but in reality, the IRS will most likely take you to task as to the whole return.

IRS Voluntary Disclosure/Foreign Amnesty

If you have not properly reported your CPF to the US tax authorities you may have an issue. 

Since the nondisclosure is typically accompanied by the nondisclosure of the income generated, you may also have a potential penalty for not reporting.

Depending on the facts and circumstances you may qualify for one of the following programs:

Some of the more common programs, include:

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