Foreign Income & Taxpayers
As part of the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147, enacted in March 2010, Congress expanded the passive foreign investment company (PFIC) reporting requirements by adding new Sec. 1298(f). Under this provision, “[e]xcept as otherwise provided by the Secretary, each United States person who is a shareholder of a passive foreign investment company shall file an annual report containing such information as the Secretary may require” (emphasis added).
The broad language of this provision could cause many more shareholders to be subject to the PFIC reporting requirements than historically have been subject to them. Before Sec. 1298(f) was enacted, the only taxpayers who were required to file Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, were U.S. persons who were direct or indirect shareholders in a PFIC for each tax year in which such persons (1) recognized gain on a direct or indirect disposition of PFIC stock, (2) received certain direct or indirect distributions from a PFIC, or (3) were making an election on Part I of the form (e.g., a deemed sale election) (Form 8621 instructions (rev. December 2011)). To date, the IRS has issued limited guidance regarding the expanded reporting requirement; thus, the impact of the rule on taxpayers who invest in PFICs remains unclear.
In Notice 2010-34, the IRS clarified that the new provision is effective only for tax years beginning on or after March 18, 2010. Thus, for a calendar-year taxpayer, the first tax year that could be affected by the new filing requirements is the tax year ending Dec. 31, 2011.
Notice 2011-55 informed PFIC investors that the annual report required under Sec. 1298(f) is expected to be in the form of a revised Form 8621 attached to the PFIC investor’s income tax return or information return. This notice suspended the filing requirements for PFIC investors not otherwise required to file a Form 8621 under the current instructions to the form until the revised form is released.
After the revised Form 8621 is released, PFIC investors whose filing requirements were suspended under Notice 2011-55 will be required to attach Form 8621 for the suspended tax years to their next income tax or information return required to be filed. Due to this potential for future filing requirements related to past years, PFIC investors who currently are not required to file a Form 8621 should be aware of the possibility that they will be required to retroactively file a Form 8621 relating to tax years beginning on or after March 18, 2010.
Affected PFIC Investors
Several types of PFIC investors that historically have not filed Forms 8621 may be required to do so under Sec. 1298(f). For example, pursuant to the instructions to Form 8621, investors in Sec. 1291 funds who do not recognize gain on a direct or indirect disposition of, or receive a direct or indirect distribution from, the Sec. 1291 fund and do not make an election with respect to the fund have not been required to file Form 8621. (A Sec. 1291 fund is a PFIC for which (1) the shareholder did not make a qualifying electing fund (QEF) or mark-to-market election or (2) the PFIC is an “unpedigreed QEF” under Regs. Sec. 1.1291-9(j)(2)(iii) (Form 8621 instructions (rev. December 2011)).) Although Prop. Regs. Sec. 1.1291-1(i) provides a broader filing requirement than the instructions (similar to that of Sec. 1298(f)), many taxpayers historically have followed the instructions to Form 8621 because the regulations are not final. Notice 2011-55 similarly looks to the instructions to Form 8621 for the current filing requirements and, as noted above, intends to use the instructions as a vehicle for setting forth the revised reporting requirements under Sec. 1298(f).
In addition, certain indirect shareholders historically have not been required to file Form 8621 if an intermediate entity (e.g., a U.S. partnership) files the form. Further, although the reporting requirements of exempt organizations that invest in PFICs are not entirely clear, certain tax-exempt investors that are not subject to Sec. 1291 or the regulations thereunder may not have been required to file Form 8621. PFIC investors in the circumstances described above who historically have not filed Forms 8621 with respect to their interests in PFICs should continue to monitor any developments in this area. Upon release of the revised instructions to Form 8621 incorporating guidance under Sec. 1298(f), these investors should determine whether the revised instructions impose reporting requirements with respect to their PFIC interests.
Additional Filing Requirement
In addition to the possible expanded Form 8621 filing requirements, investors in PFICs should be aware that another filing requirement may apply. As part of the HIRE Act, Congress also enacted new Sec. 6038D, which requires certain taxpayers who invest in “specified foreign financial assets” to attach required information to their income tax return. This reporting requirement applies to taxpayers whose aggregate investment in specified foreign financial assets exceeds $50,000. Stock in a foreign corporation is considered a specified foreign financial asset for this purpose. Thus, if a PFIC investor meets the $50,000 threshold, the reporting requirements set forth under Sec. 6038D may apply to that investor in addition to the PFIC reporting requirements.
The Joint Committee on Taxation staff’s technical explanation of the HIRE Act (JCX-4-10 (Feb. 23, 2010)) indicated that “the Secretary will exercise regulatory authority under [Sec. 1298(f)] or new section 6038D to avoid duplicative reporting.” In November 2011, the IRS released Form 8938, Statement of Specified Foreign Financial Assets . The instructions to Form 8938 indicate that taxpayers who report a specified foreign financial asset on Form 8621 are not required to file Form 8938. This is consistent with temporary regulations issued under Sec. 6038D (Temp. Regs. Sec. 1.6038D-7T(a)(1)(i)(C)). However, PFIC investors who are not required to file Form 8621 nonetheless must file Form 8938 with respect to their interest in a PFIC if those investors meet the $50,000 threshold discussed above.
Taxpayers who are required to file Form 8938 and fail to do so timely are subject to a $10,000 penalty and up to $50,000 in additional penalties for continued failure to file upon IRS notification. Thus, PFIC investors who are not required to file Form 8621 should consider carefully whether they must file Form 8938.
Although the IRS has not yet implemented guidance that expands the current PFIC reporting requirements in Form 8621, the IRS has indicated that guidance implementing Sec. 1298(f) is forthcoming and is expected to be set forth in revisions to Form 8621 and the instructions. Thus, PFIC investors should be aware that these rules may change and should be alert to developments that may affect their PFIC reporting requirements.
Annette Smith is a partner with PwC, Washington National Tax Services, in Washington, D.C.
For additional information about these items, contact Ms. Smith at 202-414-1048 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with PwC.