PORTFOLIO

International Pension Planning (Portfolio 320)

Tax Management Portfolio, International Pension Planning, No. 320-3rd, is intended to assist the U.S. tax specialist with issues arising from the implementation of pension plans in an international context. “Pension” is intended to encompass a wide variety of deferred compensation arrangements, including qualified pension, profit-sharing, stock bonus and employee stock ownership plans, as well as nonqualified plans, individual deferral arrangements and stock-based executive plans.

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DESCRIPTION

Tax Management Portfolio, International Pension Planning, No. 320-3rd, is intended to assist the U.S. tax specialist with issues arising from the implementation of pension plans in an international context. “Pension” is intended to encompass a wide variety of deferred compensation arrangements, including qualified pension, profit-sharing, stock bonus and employee stock ownership plans, as well as nonqualified plans, individual deferral arrangements and stock-based executive plans.

The issues addressed are primarily tax, but also covered are ERISA issues. This Portfolio addresses Social Security topics (FICA, taxation and benefits), but local law issues are touched upon only in a cursory fashion, and only as needed to address a point of U.S. tax law or ERISA. Estate tax issues are given only a brief treatment.

The context of the analysis varies. The analysis focuses on the tax effects of plans from the point of view of the employer (primarily deduction issues) as well as the employee (primarily income inclusion issues). Both inbound transactions (U.S. taxation of non-U.S. employers or employees) and outbound transactions (U.S. taxation of U.S. employers or employees working abroad) are considered. A separate section covers deductions for U.S. employers for contributions and accruals to foreign retirement plans (i.e., §404A).

Finally, this Portfolio assumes a basic knowledge of ERISA, qualified plan rules and U.S. taxation of international operations. However, each section contains enough background material to enable subscribers who are unfamiliar with these areas of the law to use the Portfolio.


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AUTHORS

RUSSELL E. HALL
Russell E. Hall, J.D., Fordham Law School (1978); LL.M. in taxation, New York University School of Law (1979); B.A., S.U.N.Y. at Albany (1975); member, New York State Bar; member, Retirement Security Committee, ERISA Industry Committee; member, Tax Law Section, American Bar Association.

TABLE OF CONTENTS

Detailed Analysis

I. Outbound Transactions

A. U.S.-Based Multinational Employers

1. Qualified Plans

a. Ability to Cover Employees Outside the U.S.

(1) Controlled Group Rules

(2) Section 406

(3) Section 407

(4) Retention on Covered Payroll

(5) Imputed Service and Pay

b. Location of Trust Funds

c. Impact of Coverage of Employees Working Outside the U.S. on U.S. Nondiscrimination Rules

d. Coverage, Vesting and Other Rules

e. Deduction/Charge to Earnings for Contributions Attributable to Employees Outside the U.S.

2. Nonqualified and Foreign Plans

a. Reach of ERISA Outside the United States; Impact on Taxation

b. Location of Trust Funds

c. Deductions/Charge to Earnings for Contributions Attributable to Foreign Plans

d. Election of § 404A and Its Impact on Deductions/Charges to Earnings

e. Taxation of Foreign Trust Earnings

(1) U.S. Source Income

(2) Grantor Trust Rules

(a) Proposed § 671 Regulations

(b) Section 679 Provisions

f. Reporting Requirements for Foreign Plans and Trusts

g. Plans for International Executives (TCN/IME Plans)

(1) In General

(2) Unfunded Plans

(3) Promise of Subsidiary

(4) Funded, Nonvested Trusts

(5) Coverage in the U.S. Plan

B. U.S. Taxation of Employees Working Abroad

1. Qualified Plans

a. U.S. and Local Law Taxation of Accruals

(1) U.S. Citizens, Residents

(2) Nonresident Aliens

b. U.S. and Local Law Taxation of Distributions

(1) U.S. Citizens, Residents

(2) Nonresident Aliens

c. Integration With Foreign Plans; Offsets

2. Nonqualified Plans

a. U.S. and Local Law Taxation of Accruals

(1) U.S. Citizens, Residents

(2) Nonresident Aliens

b. U.S. and Local Law Taxation of Distributions

(1) U.S. Citizens, Residents

(2) Nonresident Aliens

c. Tax Haven Trusts; Locally Approved Plans

C. Reach of ERISA to Foreign Plans

II. Section 404A - Deductions for Foreign Plans

A. Overview of Taxation of Foreign Branches and Subsidiaries

1. Branch v. Subsidiary

2. Foreign Tax Credits

B. Issues with Retirement Plans

C. Overview of § 404A and Legislative History

D. Default Options if § 404A Not Elected

E. What Plans Qualify?

1. Plans of Deferred Compensation

2. Termination Indemnity Plans

3. Additional Requirements Applicable to All Plans

a. Written Plan

b. Exclusive Benefit

c. 90% for Non-Resident Aliens Test

d. Election by Taxpayers

4. Funded Plan Requirements

a. Payment to Trust or Equivalent

(1) Definition of Equivalent of a Trust

(2) Accumulated for Deferred Compensation

(3) Prohibited Transactions

(4) Contributions Must Have Substance

(5) Reversions

(6) German “Security Contracts”

b. Requirement of Payment

F. Deduction Amounts and Limitations

1. Ordinary and Necessary Expenses

2. Reasonable Actuarial Assumptions and Methods

3. General Structure of Limits

4. Basic Limits

a. Funded Plans

(1) U.S. Amount Limits

(2) Full Funding Limit

(3) Carryovers

b. Reserve Plans

(1) Reasonable Addition to Reserve

(2) Assumptions

(3) Explanation of Method in Proposed Regulations

5. Additional Limits

a. Foreign Law Deduction Limit

b. Currency Translation

c. Nonqualified Individuals

6. Data and Recordkeeping Requirements

G. Section 481 Adjustment

1. In General

2. When a § 481 Adjustment Is Needed

3. Mechanics and Definitions of Terms

4. Amounts in Typical Transactions

a. Initial Adoption - Funded Plans

b. Initial Adoption - Reserve Plans

c. Switching from Funded to Reserve Methods

d. Switching from a Reserve Method to a Funded Method

e. Cessation of § 404A Election

5. Amortization Periods

H. How to Make an Election

1. Effective Dates and General Background

2. Current (i.e., Future) Elections

a. Branch

b. Subsidiary

c. Changes and Revocations

3. Retroactive and Transition Period Elections

a. In General

b. Definitions

c. Retroactive Elections

(1) Subsidiaries

(2) Branch Plans

(3) Data Requirements

d. Transition Period Elections

4. Closed Years and Other Considerations in Making Elections

III. Inbound Transactions

A. Foreign Multinationals with U.S. Operations

1. Qualified Plans

a. Special Problems of Discrimination Testing; Line of Business Rules

b. Service Counting

c. Coverage of Aliens and Offsets for Foreign Plans

2. Reach of ERISA

3. Use of Foreign Parent Company Stock in a Qualified Plan

a. ERISA

b. ESOPs

c. Securities Laws

d. ADRs

e. Basis and Deduction Issues in the Use of Parent Company Stock

B. U.S. Resident Employees of Foreign Multinationals

1. Qualified Plans

a. Local (Foreign) Taxation of U.S. Accruals

b. U.S. Taxation of Distributions Derived from U.S. Service

(1) U.S. Resident

(2) Non-U.S. Resident

c. U.S. Taxation of Distributions Derived from Trust Earnings

d. Pension Withholding

(1) U.S. Resident Aliens and U.S. Citizens

(2) Nonresident Aliens

e. Offset for Foreign Benefits

f. Estate Tax

2. Nonqualified and Foreign Plans

a. U.S. Citizens or Residents

b. Nonresident Aliens

3. Expatriation to Avoid Tax

IV. Social Security Tax, Taxation and Benefits

A. Jurisdictional Basis of Coverage/FICA Tax

1. Service Inside the United States

2. Service Outside the United States

B. Foreign Social Security Coverage

1. General Principles

2. Specific Examples

C. Totalization Agreements

1. Foreign Social Security Coverage

2. Totalization Agreements

3. U.S.-U.K. Totalization Agreement

4. Special Situations

5. Overview of U.S. Social Security Benefits

6. How Totalization Works

D. Integration with U.S. Qualified Plans

1. Historical Methods of Integration

a. PIA Offset

b. Step Rate

2. 1986 TRA

3. Integration with Foreign Social Security

E. Taxation of Social Security Benefits

1. U.S. Citizens or Residents

2. Nonresident Aliens

V. Income Tax Treaties

A. Role of Income Tax Treaties in General

1. Relationship with Tax Statutes

2. Effect on U.S. Citizens (Saving Clauses)

B. U.S. Treasury Model Treaty

1. In General

2. Pension Provisions

a. Pensions Paid

b. Accrual of Benefits

C. OECD Model Treaty

1. In General

2. Pensions Clause

D. U.S.-Canada Income Tax Treaty

1. In General

2. Taxation of Social Security

3. Pensions Clause

E. U.S.-French Income Tax Treaty; Pension Clause


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Model Clauses Extending Qualified Plan Overseas

Worksheet 2 Preamble to 1993 Proposed Section 404A Regulations

Worksheet 3 Preamble to 1996 Proposed Section 671 Regulations

Worksheet 4 1996 Model Treaty - Excerpts

Worksheet 5 1996 Treasury Model Treaty Technical Explanation - Excerpts

Worksheet 6 IRS Form W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding

Worksheet 7 IRS Form 8233 - Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual

Bibliography

OFFICIAL

Statutes:

SEC Releases:

DOL Advisory Opinions:

DOL Regulations:

Treasury Regulations:

Treasury Rulings:

Cases:

UNOFFICIAL

Periodicals:

1986

1995

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1999

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2006

2007