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By Thomas St.G. Bissell
As this author has discussed in prior commentaries, the new Form 8938 requires a U.S. citizen or resident alien (for U.S. income tax purposes) who holds an interest in a foreign "deferred compensation plan" and/or a foreign "pension plan" to furnish information about the plan to the IRS, provided that the individual's aggregate interests in "specified foreign financial assets" (SFFAs) exceeds the relevant dollar threshold. In determining what must be reported, the temporary regulations and the form's instructions provide an exception for "an interest in a social security, social insurance, or similar program of a foreign government." To date, however, the IRS has provided no further guidance on which foreign-government-sponsored "social security" programs will satisfy this exception, and which will not.1 Given the wide variety of such programs around the world, the IRS is facing the gargantuan task of determining on a country-by-country basis which programs qualify and which do not,2 and until it does so, U.S. individuals with any interest at all in such programs may be risking severe penalties if they assume without seeking professional advice that their particular interest in a foreign system satisfies the IRS exception.
Also as discussed previously, the Form 8938 instructions state that if the taxpayer received no distributions during the year from a foreign pension plan and does not know or have reason to know the value of his interest in the plan on the last day of the year, he may use a value of zero for the plan. However, the IRS has hedged this rule with caveats that should make most taxpayers wary of relying on it.3 Thus, with respect to a foreign-government-sponsored retirement plan, unless the taxpayer is certain that his participation in a particular plan satisfies the "social security" exception, he should report his interest in the plan and not rely on the "zero value" rule.
Despite the absence to date of IRS guidance on which foreign plans will satisfy the social security exception, if a taxpayer (or his advisor) wishes to do research on which foreign plans might satisfy the exception, a good place to start might be the website maintained by the U.S. Social Security Administration (SSA) on "Social Security Programs Throughout the World."4 The SSA describes the details of foreign-government-sponsored programs with respect to old age, disability, and survivors' pensions and most countries of the world are covered. However, the fact that a particular foreign program is described on the SSA website does not necessarily mean that the IRS will agree that the program satisfies the social security exception in the Form 8938 regulations and instructions.
To the extent that a particular foreign-government-sponsored program is very similar to the U.S. social security program, it should probably satisfy the IRS exception. Speaking very broadly, therefore, if the foreign plan is financed in the form of statutorily required employer and/or employee contributions to a fund that is controlled by the foreign government itself, and if retirement, disability, and/or survivors' benefits are paid directly from that fund by the foreign government, the plan should probably satisfy the IRS exception. The difficulty is that an increasing number of foreign governments have been partially or fully "privatizing" their government-sponsored retirement plans, to the extent that some of those plans have increasingly come to resemble employer-sponsored "defined contribution" plans which in the United States are tax-qualified under §§401 ff. of the Code, but which clearly are not part of the U.S. social security system. For example, the government of Chile famously adopted such a plan in the 1980s, and Australia did so in the 1990s.5 The fact that similar proposals in the United States have been repeatedly rejected by the U.S. Congress suggests that the IRS might not consider those plans to satisfy the Form 8938 exception - even though those plans are described in detail on the SSA's website.
An important step that the IRS could take to assist taxpayers in this area is to adopt a rule that is contained in the §409A regulations. Regs. §1.409A-1(a)(3)(iv) provides that the term "nonqualified deferred compensation" does not include "a social security system of a foreign jurisdiction to the extent that benefits are provided under or contributions are made to a government-mandated plan as part of that foreign jurisdiction's social security system." Although that language probably includes foreign plans that have been partially or fully privatized but which are also government mandated (such as those in Chile and Australia), it is not absolutely clear on the question. However, the same regulation also provides that nonqualified deferred compensation "does not include any social security system of a jurisdiction to the extent that benefits provided under or contributions made to the system are subject to an agreement entered into pursuant to section 233 of the Social Security Act (42 U.S.C. 433) with any foreign jurisdiction." In other words, the provisions of §409A do not apply to any foreign system that is specifically included within the terms of a social security "totalization" agreement that the United States has concluded. Because the privatized Chilean and Australian systems are expressly covered by the United States' social security totalization agreements with those countries, those particular systems are excluded from §409A.6 Unless the IRS expressly adopts a similar rule so as to clarify the Form 8938 social security exception, however, a taxpayer who has an "interest" in a foreign system like Chile's or Australia's cannot be certain whether that interest is an SFFA or not.
Because the United States has social security totalization agreements with 24 foreign countries and because the vast majority of U.S. individuals who participate in foreign-government-sponsored retirement plans probably do so in those 24 countries, an exception for participation in those countries' plans would vastly simplify the task of complying with Form 8938 for the vast majority of U.S. individuals. From a policy standpoint, there seems to be no reason for the IRS to collect information about U.S. individuals' participation in those plans. To the extent that the IRS nevertheless wishes to require individuals who participate in foreign privatized systems to report on those plans, it could provide for specific "exceptions to the exception" by naming which totalization countries are not covered by Form 8938's social security exception. In any event, the 24 totalization countries would be an excellent starting point for the very necessary guidance that the IRS needs to provide in this area.
However, more importantly, the IRS could vastly simplify its task by simply removing foreign pension plans (and foreign deferred compensation plans) entirely from the purview of §6038D. Although the IRS probably has the authority under the literal language of §6038D to require reporting on foreign pension plans, there is absolutely no indication in the legislative history that this was intended by Congress.7
This commentary also will appear in the October 2012 issue of the Tax Management International Journal. For more information, in the Tax Management Portfolios, see Blum, Canale, Hester, and O'Connor, 947 T.M., Reporting Requirements Under the Code for International Transactions, and in Tax Practice Series, see ¶7170, U.S. International Withholding and Reporting Requirements and FATCA.
1 Because foreign deferred compensation plans and foreign pension plans were not mentioned in the discussion of SFFAs in the legislative history of §6038D - a fact that has led many commentators to criticize the IRS for requiring foreign deferred compensation plans and foreign pension plans to be reported at all - the Joint Committee on Taxation's report on the HIRE Act, which enacted §6038D, also does not offer any guidance.
2 The task before the IRS is quite similar to the research that it had to do for almost every country in the world in order to determine which incorporated entities in each country were classified as "per se corporations", and thus ineligible to be treated as "disregarded entities" under the "check-the-box" regulations. See Regs. §301.7701-2(b)(8).
5 For descriptions of the Chilean and Australian systems on the SSA website, see http://www.ssa.gov/policy/docs/progdesc/ssptw/2010-2011/americas/chile.pdf and http://www.ssa.gov/policy/docs/progdesc/ssptw/2010-2011/asia/australia.pdf.
6 See Article 2.1.b of the Chilean totalization agreement at http://www.ssa.gov/international/Agreement_Texts/chile.html and Article 2.1.b of the Australian totalization agreement at http://www.ssa.gov/international/Agreement_Texts/Australia.html.
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