Thailand Provident Funds and Foreign Trusts

[scoutman360]

Does anyone know if Thailand Provident Funds provided by Thailand employers are considered Foreign Trusts under the U.S. tax code (for U.S. citizens)? Thus they should be reported on form 3520?

I have asked different CPA's and get different answers. I need to ask a broader audience to get to the bottom of this. Thanks in advance.

[Time Traveller]

The answer is complex. So assuming you own less than 10% of the shares and it's not an exempted retirement fund account in a IGA agreement (none in Thailand are) then "The position of the IRS is that all non U.S. mutual funds are considered to be PFICs and will now require filing Form 8621 ...."

The situation is for US taxpayers it's just not worth the hassle of investing in any foreign funds. There is an explanation right here

http://thunfinancial.com/why-americans-should-never-ever-own-shares-in-a-non-us-incorporated-mutual-fund/

Edited January 19, 2015 by Time Traveller

[scoutman360]

The answer is complex. So assuming you own less than 10% of the shares and it's not an exempted retirement fund account in a IGA agreement (none in Thailand are) then "The position of the IRS is that all non U.S. mutual funds are considered to be PFICs and will now require filing Form 8621 ...."

The situation is for US taxpayers it's just not worth the hassle of investing in any foreign funds. There is an explanation right here

http://thunfinancial.com/why-americans-should-never-ever-own-shares-in-a-non-us-incorporated-mutual-fund/

Thanks TIme Traveler. I read the link and it generally talks about PFICs and foreign mutual funds. The confusion sets in if a Provident Fund is truly a foreign "non-qualified" pension plan. Yes? In such case, it could fall under the reporting requirements of a Foreign Trust. This link here has a simple explanation. According to page 8, a Provident Fund would fit the criteria.

http://mcgladrey.com/content/dam/mcgladrey/pdf_download/wc_tax_obligations_investment_retirement_20140715.pdf

So that begs the question, form 8621 or 3520?

Edited January 19, 2015 by scoutman360

[Misty]

Hi Scoutman,

The US tax professionals (CPAs and tax lawyers) we talk to say that the IRS hasn't ruled on Thai Provident Funds, but that almost certainly they should be treated as either 1) Foreign Trusts (Form 3520) or 2) PFICs (Form 8621). The one making the case for Foreign Trusts is a Partner at an international tax firm. Without a specific ruling, the various tax professionals say you can choose your poison here. If you choose to treat it as a PFIC and the PFIC mark-to-market option is available to you, then the tax treatment may not be that different between the two.

While the article that Time Traveller sites is correct in terms of the punitive nature of PFICs in general, it is not definitely NOT true that you should "never ever own one." The author of that article can be forgiven in that he lives in Wisconsin and hasn't considered the cases where US expats can be financially ahead from owning a PFIC. For example, say your company matched your contribution to the Provident Fund. It could easily be worth it. Or say you contribute to some of the other potential PFICs in Thailand such as an RMFs or LTFs and your overall tax bill (Thai + US together) was lowered significantly because of it. In those cases, the only drawback in owning the PFIC is having to file the Form 8621 - which I will admit -, having filed 14 of them last year alone - is a bitch. But it can be worth it.

[scoutman360]

Hi Scoutman,

The US tax professionals (CPAs and tax lawyers) we talk to say that the IRS hasn't ruled on Thai Provident Funds, but that almost certainly they should be treated as either 1) Foreign Trusts (Form 3520) or 2) PFICs (Form 8621). The one making the case for Foreign Trusts is a Partner at an international tax firm. Without a specific ruling, the various tax professionals say you can choose your poison here. If you choose to treat it as a PFIC and the PFIC mark-to-market option is available to you, then the tax treatment may not be that different between the two.

While the article that Time Traveller sites is correct in terms of the punitive nature of PFICs in general, it is not definitely NOT true that you should "never ever own one." The author of that article can be forgiven in that he lives in Wisconsin and hasn't considered the cases where US expats can be financially ahead from owning a PFIC. For example, say your company matched your contribution to the Provident Fund. It could easily be worth it. Or say you contribute to some of the other potential PFICs in Thailand such as an RMFs or LTFs and your overall tax bill (Thai + US together) was lowered significantly because of it. In those cases, the only drawback in owning the PFIC is having to file the Form 8621 - which I will admit -, having filed 14 of them last year alone - is a bitch. But it can be worth it.

Misty, that was a great response and I agree with some of your points. I have some Thailand mutual funds and they have out performed year-after-year the U.S. funds. And with company matching contributions, it is worth the extra hassle. Now, how to make things straight with the IRS?

I found this link regarding the Singapore Provident Funds, and the IRS seems to treat it as a non-qualified pension plan thus should be under form 3520. There are some differences with Singapore and Thailand Provident Funds in that the fund participation is a mandatory participation by employees in Singapore, but the rest is similar enough to make one speculate how to report their Thailand fund.

http://intltax.typepad.com/intltax_blog/foreign-pensions/

Wouldn't reporting the Provident Fund under the "non-qualified" pension plan (Foreign Trust) Form 3520 be an advantage? Because that does not required to pay tax annually on the "unrealized gains" (increase in fund value) until the fund is sold? If one chooses PFIC approach and the "Mark-to-Market" election on Form 8621 then one must pay the tax annually even though the fund was not sold). I may misunderstand something... but seems to be the case.

[Misty]

Wouldn't reporting the Provident Fund under the "non-qualified" pension plan (Foreign Trust) Form 3520 be an advantage? Because that does not required to pay tax annually on the "unrealized gains" (increase in fund value) until the fund is sold? If one chooses PFIC approach and the "Mark-to-Market" election on Form 8621 then one must pay the tax annually even though the fund was not sold). I may misunderstand something... but seems to be the case.

It could very well be an advantage to use Form 3520. Although I've filed plenty of form 8621s for RMFs & LTFs, unfortunately I've never filed Form 3520 to judge. PM me if you'd like contact details on the international tax firm that suggests Form 3520 treatment in this case - perhaps they can help.

[Time Traveller]

Hi Scoutman,

The US tax professionals (CPAs and tax lawyers) we talk to say that the IRS hasn't ruled on Thai Provident Funds, but that almost certainly they should be treated as either 1) Foreign Trusts (Form 3520) or 2) PFICs (Form 8621). The one making the case for Foreign Trusts is a Partner at an international tax firm. Without a specific ruling, the various tax professionals say you can choose your poison here. If you choose to treat it as a PFIC and the PFIC mark-to-market option is available to you, then the tax treatment may not be that different between the two.

While the article that Time Traveller sites is correct in terms of the punitive nature of PFICs in general, it is not definitely NOT true that you should "never ever own one." The author of that article can be forgiven in that he lives in Wisconsin and hasn't considered the cases where US expats can be financially ahead from owning a PFIC. For example, say your company matched your contribution to the Provident Fund. It could easily be worth it. Or say you contribute to some of the other potential PFICs in Thailand such as an RMFs or LTFs and your overall tax bill (Thai + US together) was lowered significantly because of it. In those cases, the only drawback in owning the PFIC is having to file the Form 8621 - which I will admit -, having filed 14 of them last year alone - is a bitch. But it can be worth it.

Let me clarify, from a tax point of view it's not worth owning foreign mutual funds. The fund may be a great performing fund, but you will be get no tax concessions from the IRS. In Thailand most of the funds seem to exist only because of the tax concessions given to investors. My own Provident fund (before I became a US tax resident) barely made 1% each year after management fees.

And even if the Thai Provident funds were ruled to be exempted foreign retirement accounts, the individuals would still need to report and pay tax on them as well. The exemption is only for the financial institutions, not the individuals.

[scoutman360]

Wouldn't reporting the Provident Fund under the "non-qualified" pension plan (Foreign Trust) Form 3520 be an advantage? Because that does not required to pay tax annually on the "unrealized gains" (increase in fund value) until the fund is sold? If one chooses PFIC approach and the "Mark-to-Market" election on Form 8621 then one must pay the tax annually even though the fund was not sold). I may misunderstand something... but seems to be the case.

It could very well be an advantage to use Form 3520. Although I've filed plenty of form 8621s for RMFs & LTFs, unfortunately I've never filed Form 3520 to judge. PM me if you'd like contact details on the international tax firm that suggests Form 3520 treatment in this case - perhaps they can help.

It makes sense that RMF's and LTF's should be handled as PFIC's (form 8621) because they are true mutual funds that can be purchased individually. A Provident fund, on the other hand, is a company offered pension plan and controlled through one's employer. Sounds like there are reporting options in this case.

Thank you Misty and Time Traveler. This is an important subject for U.S. tax filers that really hasn't been addressed in the past.

[Caprelo]

What happens when you cash out your Provident fund? Saying you worked for a company 15+ years and it is a substantial amount of money, what would be the tax liability in the US?

[scoutman360]

What happens when you cash out your Provident fund? Saying you worked for a company 15+ years and it is a substantial amount of money, what would be the tax liability in the US?

It depends. I will try to answer, but any experts out there may need to correct my mistakes. If you do nothing, the results could be devastating. That is why it is important to get your reporting straight now.

If you do nothing, and only report the sale of funds the year you cash out:

1. If the fund is considered a pension plan Foreign Trust (Form 3520) - Not sure. There might be big penalties for not declaring ownership in the trust. Need an expert to advise.
2. If the fund is considered a PFIC (Form 8621) - since you did not declare an election on Form 8621, and didn't send in Form 8621 annually, you are by default under Election 1291. This is the worst thing to happen. Under this election, you are taxed at the highest possible tax rate (39.6%) for "excess distributions". An excess distribution is defined as a distribution that is 125% greater than the average distribution of the past 3 years. In other words...Year 1 - no sale, Year 2 - no sale, Year 3 - sell $40,000 in gains, then your excess distribution is $40,000. In addition, you must pay interest on all the previous years you owned the fund. Interest in accumulated in "days". So, you can easily wipe out all your gains after 15 years and get nothing. The calculation is complex, but I am keeping it simple for this example.

If you report annually your fund under Form 3520 or Form 8621:

1. If the fund is considered a pension plan Foreign Trust (Form 3520) - Not sure. I believe you pay tax on the gains as normal income when you sell the fund. No tax on "unrealized gains" (growth in the value of the fund) each year.
2. If the fund is considered a PFIC (Form 8621) - One option is to declare your fund under Election 1296 "Mark-to-Market". Under this option, you must pay tax every year on the "unrealized gains" in the fund. Its painful, because you are paying tax on a fund you haven't even sold yet. But, you will be paying tax at your normal tax rate and not the maximum 39.6%. and you won't be paying interest on previous years. It is far worst if you do nothing and let yourself fall under the Section 1291 default.

Hope that helps. There might be some advantages to not sell your fund completely. In other words, if you sell a small amount every year, then after 3 years the sale won't fall under the "excess distribution" definition anymore, and you could avoid the penalties. I haven't looked into it yet, and I hope there is an expert out there to tell us.

Edited January 20, 2015 by scoutman360

[Caprelo]

Thank you. Very Scary!