Johann Erdmann Hummel - Chess Players and Expats

Overseas Retirement for Expats

Surveys have shown that more and more multinationals want to exercise control over their worldwide benefits programs at the Home Office level. The principal objectives are to manage costs and ensure compliance and competitiveness of their local benefits plans in each country. For most companies, this is easier said than done.

For multinational companies, growing a business means leveraging the right talent in the right place. In the world of “global nomads” — expatriates and third country nationals who spend much of their working lives away from their home country — the provision of future financial security becomes ever more important. Advisers are here to help you.

Compensation has evolved substantially over the years, with the focus shifting away from relocation allowances to global special benefits. As pension debates in many countries bring retirement planning to the fore, employer-sponsored retirement benefits are often seen as key in a competitive remuneration program. Many mobile employees do not remain long enough in a given location to build an old-age retirement benefit under the local rules, and local social legislation and related tax regimes often complicate their participation in locally organized retirement plans.

Inclusion of U.S. Taxpayers

Because U.S. citizens and U.S. tax residents are being taxed on their worldwide income, additional reporting requirements apply to these employees. As a result, a well-designed 402(b) solution must provide for simplified tax reporting. The selected 402(b) must be one that requires the individual to file FinCEN 114 and IRS 8938 only and for the employer to have no reporting requirement.

Where employees in today’s world are almost without exception subject to tax on worldwide income in their resident country, and U.S. persons are subject to the Foreign Account Tax Compliance Act (FATCA), U.S. Tax, resident country tax and worldwide income tax in the U.S. and their country of residence – this plan delivers a truly cross-border U.S. and Foreign employee solution.

Both the mobile U.S. person and foreign employee need an effective tax neutral and or tax deferred retirement plan. The choice of investment tools and assets must reflect an internationally diverse membership. The decision for a retirement planning must also explicitly address issues of asset protection and survivorship – areas often unwisely overlooked or discounted in plan evaluation.

The outcome is a specific 402(b) plan that delivers the top functions for mobility and talent globally, which include:

  • tax deferred gains and accumulations for U.S. persons and all nationalities
  • portable without tax consequence across borders
  • contributions without tax reporting on participation amount
  • not included in worldwide assets of Employer or Employee
  • deferred income reporting on IRS Form 8938
  • deferred reporting to the Treasury on FinCEN 114

What Foreign Account Tax Compliance Act (FATCA) is all about in general, we know all of that, and there are some exemptions and things, but as a practical point, many individuals may want to listen to the sound of practicalities rather than the legal tra-la-la.

What it all comes down to in practical terms is where anyone, whether a U.S. person or a non-U.S. person, is investing in anything, whatsoever, that is denominated in U.S. Dollars whether it is real estate, an investment fund, a share, private equity, bank account and so on, anywhere in the world, is subject to FATCA.

The U.S. government claims that using the U.S. dollar—which nearly every bank in the world does—gives it jurisdiction, even if there are no other connections to the U.S.

Recently the U.S. government fined BNP Paribas over $8 billion for doing business with countries it doesn’t like. The transactions were totally legal under E.U. and French law, but illegal under U.S. law. The U.S. successfully claimed jurisdiction because the transactions were denominated in U.S. dollars—there was no other U.S. connection.

Because U.S. stocks and bonds are so widely owned globally, virtually all financial institutions everywhere in the world receive substantial U.S. sourced payments, mostly on behalf of clients who have no connection to the U.S.

U.S. Sourced payments include: U.S. securities, foreign securities held by U.S. persons directly, or indirectly via a company or trust, total return swaps or securities lending referenced to U.S. securities, previously exempt from withholding tax now qualify as U.S. source payments, derivatives products (dividend equivalent payments from derivatives which are referenced to U.S. securities are now treated as dividends from a U.S. source, therefore triggering a 30% withholding tax).

Furthermore, 30% of any funds sent from the U.S. to a non-compliant financial institution will be withheld by the U.S. financial institution. U.S. Sourced is a key issue here because that is a de facto set of capital control. Allowing 30% of these payments to be withheld will not be an acceptable option.

Any financial institution anywhere in the world not voluntarily complying with FATCA will find that 30% of any U.S. sourced payment (e.g. stock dividend, maturing principal payment from a U.S. corporate or government bond) will be withheld. Therefore, that means unless or until that person either has a FATCA registration, or unless they are able to swing themselves under it, they can’t deal.

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