US Tax & Taiwan – FATCA, FBAR, Totalization, Income & Estate Tax
When it comes to analyzing the international tax law between Taiwan and the United States, then are many intricacies and complexities that make understanding international tax law harder than it needs to be.
It would be impossible to provide a comprehensive detailed summary in one article (and still keep you awake).
Therefore, we will summarize the main aspects of international tax law as it involves Taiwan and the United States.
- Income Tax Treaty
- Estate Tax Treaty
- FATCA Agreement & Reporting Institutions (FFIs)
- Totalization Agreement
- IRS Offshore Voluntary Disclosure Options
Income Tax Treaty
The United States has not entered into an income tax treaty with Taiwan. While this does not preclude a person who is considered a US person and earning income in Taiwan (and paying taxes in Taiwan) to take a foreign tax credit in the United States for taxes paid in Taiwan – it can have other negative implications.
For example, the United States has a tax treaty with the UK. That tax treaty specifically states that under most circumstances UK retirement is not taxed in the US until it is distributed (as opposed to immediate taxation of accrued but non-distributed foreign income). Of course, exceptions, exclusions and limitations to apply, such as lump sum payments.
Without a Tax Treaty, there can be complications, such as is the case with Singapore. There is no specific tax treaty with Singapore, and therefore income from a CPF (which is a mandated retirement scheme under Singaporean law and mimics a 401(k)/Social Security) may be immediately taxable by the United States, even though it is a provident fund, mandated by the Singaporean government, and not distributed at the time it is being taxed by the United States (accrued, but non-distributed income).
For non U.S. Persons, this type of immediate (and unfair) taxation can be a big deterrent to becoming a U.S. person, since a foreign person can see their CPF grow tax-free in Singapore, on income that otherwise would otherwise be taxable (even if not distributed) in the U.S.
**It should be noted, that Taiwan has entered into tax treaties with many other countries, just not with the United States.
Estate Tax Treaty
The United States has entered into 19 estate tax treaties with various different countries, but unfortunately the United States has not entered into an estate tax treaty with Taiwan.
You should speak with an estate planning attorney prior to executing an estate plan, if you are a US person who has significant assets in Taiwan.
Receiving a Gift or Inheritance From a Foreign Person
If you are a U.S. Person and receive a gift from a Foreign Person, Foreign Business or Foreign Trust, you may have to file a Form 3520. The failure to file these forms may lead to IRS Fines and Penalties (see below).
Resources: Form 3520
FATCA is the Foreign Account Tax Compliance Act. It is a US tax law designed to combat offshore tax evasion and facilitate the reporting of foreign accounts.
There are more than 110 countries that have entered into FATCA agreements with the United States, and Taiwan is one of them.
Taiwan was one of the hold-outs, but in the end, Taiwan relented and signed the FATCA Agreement late in 2016 – prior to signing the agreement, Taiwan had entered into an agreement “in substance” in 2014.
What Does This Mean to You?
It means that hundreds of thousands of Foreign Financial Institutions (FFIs) worldwide (including Taiwan) are proactively reporting US account holder information to the United States.
Many FFIs appear to simply be gathering and reporting individuals to the U.S. if there are any ties between the account-holder and United States (current U.S. address, former U.S. address, U.S. citizen or U.S. Legal Permanent Resident status).
FATCA Reporting can have very serious consequences for many reasons:
– Non-Reporting of FBAR (Penalties range from a penalty waiver, all the way up 100% value of the penalty in a multi-year audit and determination of willfulness)
– Penalty Non-Compliance with FATCA Penalties ($60,000 Max)
– Discovery of Nominee or other Unreported Companies not properly reported on Form 5471 or 8865
– Discovery of PFIC (Passive Foreign Investment Companies) and penalties under 8621 (non-monetary, but still intrusive)
– If an Account was used to receive or transfer a monetary gift (s) to the U.S., it may lead to various penalties as well
The United States has made international tax compliance a key enforcement priority, and recently announced several new tax compliance groups designed to focus on offshore and foreign money.
Which Banks in Taiwan Report U.S. Account Holders?
As of now, there are nearly 2000 Foreign Financial Institutions, within Taiwan that report US account holder information to the IRS. The list can be found here: Taiwan FFI List.
What is important to note, is that the list is not limited to just bank accounts. Rather, when it comes to FATCA or FBAR Reporting, it may involve a much more broad spectrum of assets and accounts, including:
- Bank Accounts
- Investment Accounts
- Retirement Accounts
- Direct Stock Ownership
- ETF and Mutual Fund Accounts
- Pension Accounts
- Life Insurance or Life Assurance Policies
The purpose of a Totalization Agreement is to help individuals avoid double taxation on Social Security (aka U.S. individuals living abroad and who might be subject to both US and foreign Social Security tax [especially self-employed individuals] from having to pay Social Security taxes to both countries).
As provided by the IRS: “The United States has entered into agreements, called Totalization Agreements, with several nations for the purpose of avoiding double taxation of income with respect to social security taxes. These agreements must be taken into account when determining whether any alien is subject to the U.S. Social Security/Medicare tax, or whether any U.S. citizen or resident alien is subject to the social security taxes of a foreign country”
The United States has only entered into 26 Totalization Agreements, and unfortunately, none of them are with Taiwan.
IRS Offshore Voluntary Disclosure
At Golding & Golding, we limit our representation exclusively to IRS Offshore Voluntary Disclosure matters. We represent individuals and businesses throughout Taiwan, nationwide, and worldwide with safely getting into compliance with IRS tax law.
We have helped numerous individuals from Taiwan in cases worth upwards of $15-$20 million. We have also successfully represented clients in other countries with upwards of $40 million in unreported accounts and assets (in a single disclosure).
Which Offshore Disclosure Program Should I Enter?
Oftentimes, a client does not need to enter the traditional OVDP, but sometimes they prefer it (severely reduced audit risk or chance of prosecution, and the ability to take tax positions unavailable in the Streamlined Program). Depending on the facts and circumstances of your case, you may be able to qualify for the Streamlined Program or a Reasonable Cause submission.
The following is a brief summary of the programs, followed by link to our FAQ Pages, where you will find more information then you may ever want to know about IRS offshore disclosure.
OVDP is the traditional Offshore Voluntary Disclosure Program. It is intended for individuals, businesses, and estates that are either willful, or seeking specific protection from the IRS.
OVDP comes with a pretty hefty penalty, but it comes with the peace of mind. In addition, you may be able to opt out of the program and seek to reduce penalty.
OVDP basics are as follows:
- Eight (8) years of tax returns to be compliant
- Eight (8) years of FBARs to be compliant
- 20% penalty and interest on taxes due for each year
- A 27.5% or 50% penalty depending on whether the money was in a bad bank
- little to no chance of an IRS audit (as long as a person makes a full disclosure)
- little to no chance of an IRS Criminal Investigation (as long as a person makes a full disclosure)
*Unlike the Streamlined Program (below), a person can make a mark-to-market election to reduce the tax ramifications of the previously undisclosed PFIC, and the person may make a formal FAQ 55 request for a exclusion of certain retirement funds from the penalty base.
OVDP Resources: OVDP Summary
Streamlined Foreign and Domestic
The Streamlined Program is broken down into two further programs: the Streamlined Domestic Offshore Procedures and the Streamlined Foreign Offshore Procedures.
These programs require much less compliance, and is limited to only three (3) years of compliant tax returns, and six (6) years of FBARs. In addition, there is no penalty on the taxes due and only 5% penalty on the highest year-end balance (typically less than the max balance used for OVDP).
Moreover, if a person can meet the strict definition of a foreign resident under the streamlined program definition – all penalties are waived.
While this may sound great, the IRS does not provide any protection against IRS criminal investigation or IRS audit on matters involving the disclosure.
In addition, that the IRS believes you are willful, but trying to “sneak” into the streamlined program it could be a big problem.
Streamlined Program Resources: Streamlined Disclosure Summary
Reasonable Cause is a very specific process, which is based on a person’s facts and circumstances regarding current and/or previous non-compliance. You should speak with an experienced Offshore Disclosure Attorney before submitting a reasonable cause statement to the IRS.
Common International IRS Penalties
Depending on a taxpayer’s particular facts and circumstances, the following penalties could apply. The following list is summarized from the IRS penalty list:
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.
FATCA Form 8938
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.
A Penalty for failing to file Form 3520
Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
A Penalty for failing to file Form 3520-A
Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
A Penalty for failing to file Form 5471
Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. 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.
A Penalty for failing to file Form 5472
Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, 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.
A Penalty for failing to file Form 926
Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A Penalty for failing to file Form 8865
Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, 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, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Fraud penalties imposed under IRC §§ 6651(f) or 6663
Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)
Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
Criminal Charges related to tax matters include tax evasion (IRC § 7201)
Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
**A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
Other Important Issues: (Golding & Golding Summaries):
The following are links to other resources we provide on common international tax related issues:
- Receiving a Business Payment From Customers in Taiwan: Form 8300
- Reporting a Foreign Corporation you have in Taiwan
- Reporting a Foreign Partnership you have in Taiwan
- Reporting Foreign Investments in Taiwan
- Reporting A Rental Property in Taiwan on Your U.S. Tax
Ready to Hire an Offshore Disclosure Attorney?
Once you are ready to hire an Offshore Disclosure Attorney, it is very important to separate fact from fiction. Here is a recent article involving the different pitfalls, scams and sales pitches you need to watch out for: Attorney Fees for Offshore Disclosure – Separating Fact From Fiction.