- 1 US Tax of South America Income
- 2 Earned Income from South America
- 3 Passive Income
- 4 Pension Income
- 5 Tax Treaty
- 6 Foreign Gifts
- 7 FBAR, FATCA & Offshore Reporting
- 8 Noncompliance and Offshore Penalties
- 9 US and South America Tax and Reporting is Complicated
- 10 International Tax Law & Offshore Reporting Specialist Team
US Tax of South America Income
South America Countries and Offshore Disclosure: When it comes to international tax and offshore reporting, many US taxpayers may have overseas accounts, assets, investments and income in South America. It is not uncommon for taxpayers who were originally from countries such as Brazil, Argentina, Peru, and Chile — in which the United states has not entered into any tax treaty — to be unaware of the US tax and reporting requirements until many years after becoming a US Person. What makes it even more complicated, is that because there is no tax treaty in place with many South American countries — oftentimes, income that would otherwise be deferred under a tax treaty (such as foreign pension income) is immediately taxable in the US — since it does not enjoy tax deferred status similar to its US counterpart (such as 401K equivalent foreign pension plans).
Let’s take a look at some of the more common South American income, assets and investment related issues that result in significant US tax implications.
Earned Income from South America
When discussing South America and U.S. tax reporting, some of the more common countries, include:
- Costa Rica
The United states taxes US persons on their worldwide income. US person refers to U.S. Citizens, Lawful Permanent Residents and Foreign Nationals who meet the Substantial Presence Test. If a person is considered a US person and has earned income in South America, then that income is taxable in the United states – even if the taxpayer resides outside of the United States and even if that income is already taxed.
In order to try to avoid or minimize U.S. tax implications of having earned income in South America, US Taxpayers may be able to utilize the Foreign Earned Income Exclusion (FEIE), Foreign Housing Exclusion and/or Foreign Tax Credits.
Since the US requires US persons to report all of their global foreign income on a US Tax Return, it is important to keep in mind that “income” includes passive income as well. Common types of passive income, includes:
- Rental Property Income
- Interest Income
- Capital Gain Income
- Dividend Income
- Bonus Income
Presumably, all foreign income is taxable in the US unless the tax treaty helps to reduce or eliminate tax consequences. While the Foreign Earned Income Exclusion is not available for passive income — Foreign Tax Credits may still apply to reduce or eliminate US tax consequences.
When it comes to U.S. tax law, one of the most lopsided sets of rules involves foreign pension and contribution tax implications. Typically, most foreign pensions enjoy tax deferred status in the country of source. From a U.S. tax perspective even though the foreign pension may be similar to a 401K — the US does not typically provide tax deferred treatment unless there is a treaty — such as with the Singapore CPF. And, even when a treaty is in place , it does not necessarily mean all related pension income is tax deferred.
Since many South American countries do not have a bilateral tax treaty with the United states, US persons with South American pension income may be subject to US tax consequences.
The United states has entered into more than 50 bilateral tax treaties with different countries across the globe. Unfortunately, the US has not entered into many tax treaties with South American countries. Without a tax treaty in place, income that may be otherwise tax deferred — or taxed at a reduced rate if a treaty was in place — is immediately taxable from a US perspective.
When a US person receives a gift from a foreign person in South America or any other foreign country, there may be necessary reporting requirements depending on who gave the gift and the value of the gift (or series of gifts in the same year). Typically, the taxpayer has to file a form 3520 To report the gift and if the taxpayer fails to do so — it may result in significant fines and penalties upwards of 25% value of the gift.
FBAR, FATCA & Offshore Reporting
In addition to the world wide income rules, the United states requires US persons with foreign accounts, assets and investments overseas in South America to disclose overseas accounts this information to the US government. Depending on the type of asset or account and depending on the value will help determine which form or forms are required to be filed. In general, these forms are refer to IRS International Information Reporting Forms. Some of the more common forms include:
- FBAR (FinCEN Form 114)
- Form 3520
- Form 3520-A
- Form 5471
- Form 8621
- Form 8865
- Form 8938
Noncompliance and Offshore Penalties
If a US person has undisclosed assets, investments or income from South America, it may result in significant fines and penalties if the IRS learns about the noncompliance before the taxpayer has an opportunity to get right with the Internal Revenue Service and FinCEN. being non compliant is not uncommon and to assist taxpayers comma the IRS has developed various offshore amnesty programs which can help Taxpayers safely get into compliance.
US and South America Tax and Reporting is Complicated
In conclusion, if a US person has foreign accounts, assets , investments, or income from South American countries it is important to remember that the income is reportable and taxable in the United States. In addition, foreign assets, accounts and investments are also required to be disclosed on a myriad of different international information reporting forms. While it can be unnerving to learn you are out of compliance, the IRS has developed various voluntary programs to assist Taxpayers with safely getting into compliance.
International Tax Law & Offshore Reporting Specialist Team
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm for assistance.