S. domestic law, a U.S. citizen or resident (Non U.S. person) who is a beneficiary of a foreign retirement plan would be subjected to the existing U.S. income taxation on all of the income that is accrued in their foreign investment plans even though their income is never currently distributed per se to the beneficiary. This should be the case unless the foreign retirement plan accounts as the employee's trust as described in section 402(b) of the U.S. Internal Revenue Code and the said individual is not one of the highly compensated workers who is subjected to the meaning of the section 402(b)(4)(a) Internal Revenue Code.
Therefore, as long as a given foreign retirement plan accounts as an employee's trusts with the person not being one of the highly compensated workers, then there is never an inclusion that is required by law. On the contrary, if the given foreign retirement plan is never an employee's trust or again if the given individual is one of the highly compensated workers, then the annual increase in the value of one's foreign retirement plan should be included on their individual U.S. tax return.
There are however certain rules that are deemed special and contained in the in U.S. tax treaties which may modify the way pension as well as retirement plans are taxed. It is therefore necessary for the applicable treaty to be reviewed in order to determine if the United States domestic law is effectively overridden by the existing treaty.
The non-U.S. persons may however exploit loopholes in regard to the declaration that the foreign retirement plan accounts is part of their trust when in actual sense it is not part of it and by providing falsified earning records to indicate that they are not highly compensated workers.
Legitimate opportunities for gaining significant tax benefit in offshore account operations
Due to the high level of scrutiny of offshore transactions by the IRS as well as the criminal penalties that are meted to individuals and corporation that are found to effectively evade their appropriate tax responsibilities, U.S. citizens as well as U.S.-non-citizen investors must be extremely careful in regard to how they invest their tax-reduction as well as tax-deferral investments. There are several windows of opportunity that they can exploit in order to gaining significant tax benefit in their offshore account operations. They include;
Tax reduction through credits and treaties
The U.S. And well as non-U.S. persons are noted to be not in a position to rely on the various existing treaties to reduce their appropriate tax burden. This is because the U.S. government has entered into various tax treaties with several foreign nations but has at the same time cancelled some of these treaties with the offshore tax havens. At the moment, it has tax treaties with tax havens...
The income tax treaties are specially formulated to help in relieving the U.S. taxpayers from cases of double taxation. This could be as a result of the fact that the individual could be earning income in two countries that are signatories to the treaty. These treaties may help the individuals in the elimination as well as reduction of the tax to be withheld at source.
Avoiding the designation of a CFC status
Tax on the earning of a foreign company (Non-U.S.) may effectively be deferred if the given company manages to avoid the designation as a CFC. The United States investors must ensure that they effectively own fifty percent or less of the value of the foreign operation as well as voting power or by dispersing the ownership of the company among 11 or more United States shareholders. The avoidance of the CFT status as well as the impact of the Subpart F can allow the United States investors to effectively defer the tax on the value of the share of the company's income as well as to transfer the socks of the company without any form of a penalty.
An alternative to foreign tax credit
The alternative to foreign tax credit is not an abolishment of the foreign tax credit system at all since doing so would be disastrous as it would put the U.S. fund investors at a disadvantage in comparison with the direct investors (Viitala,2004). The alternative would be to allow the payment of the foreign tax credit to be done on a case-by-case basis in order to determine the legitimacy of the claims and transactions.
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Viitala, T (2004). Taxation of investment funds in the European Union. International Bureau of Fiscal Documentation
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