PFIC reporting on structured products

Another one from me - you can tell who is just getting caught up on US taxes!

I have an investment in a structured product - and it's not in a SIPP (others have suggested that investments in SIPPs do not need PFIC reporting and I see that has been widely discussed). The way these things typically work is you invest a fixed sum - say 10K pounds - for up to 5 years. There's no income / dividends payable until the product matures - at which stage it pays a fixed percentage for each year held. The product can mature or not each year depending on some index - say the FTSE.

So the purposes of this example, let's say I have a 10K investment I made in 2016. This product does not mature until 2018, at which stage it pays 30% and the product closes, the 13K goes into my UK bank account.

How do I account for this in 2016, 2017, and 2018? PFIC? I know it needs to be FBAR and 8398.

Thanks

A

Another one from me - you can tell who is just getting caught up on US taxes!

I have an investment in a structured product - and it's not in a SIPP (others have suggested that investments in SIPPs do not need PFIC reporting and I see that has been widely discussed). The way these things typically work is you invest a fixed sum - say 10K pounds - for up to 5 years. There's no income / dividends payable until the product matures - at which stage it pays a fixed percentage for each year held. The product can mature or not each year depending on some index - say the FTSE.

So the purposes of this example, let's say I have a 10K investment I made in 2016. This product does not mature until 2018, at which stage it pays 30% and the product closes, the 13K goes into my UK bank account.

How do I account for this in 2016, 2017, and 2018? PFIC? I know it needs to be FBAR and 8398.

Thanks

A

I am not aware of any structured products that are open to US citizens, you may want therefore to ask the product provider how this should be taxed and reported.

Consequently it would be surprising if you could know today, for example, how the foreign structured product in which you have been invested would correctly be reported for US purposes. A structured product is a derivative based product, so deciding how to report and tax any such product for US purposes is always among some the most complex areas of US tax law.   This article discusses some of the initial areas of doubt:
http://www.taxanalysts.com/www/features.nsf/Articles/CD7622543681167385257CC10054108A?OpenDocument.

As you are a US person you are required to deliver annual US income tax and informational returns to the IRS.  I would suggest that you ask the product provider to provide US tax reporting packs for each of the years for which you are preparing US tax returns. These are unlikely to have been produced automatically by the product provider. The  product provider will therefore most probably need to instruct an accounting firm of their own choosing to prepare these US tax reports. This will doubtless require many days of specialist accounting.

If  the product provider do not already have such opinions, the product provider may wish to obtain and share with you its own legal opinion as to how any structured products in which you have been invested are reportable and taxable for US persons.

Hi Guya,

Thanks for the reply. The structured products in question was taken out while I was UK resident.

I followed that link - how is a normal everyday tax payer supposed to figure this out?! Is an option to file FBAR and 8398 for the structured product until it matures, then on maturity simply declare the profit as capital gain?

Thanks

Art

I have no advice for how to tax your "structured product", but I will make the observation that when one is moving across borders it's a good idea so scrub your portfolio of potentially hazardous foreign investments. For someone moving to the US that would commonly include any foreign mutual fund type investment and I think we can add "structured products" to that list now. So for anyone considering a move think about these issues and get some advice before you move.

That's why this whole thing is just such a mess; it's not clear for the average guy what we're supposed to do. There are even differing opinions between presumably highly paid advisors over what should be simple things. It just shouldn't be this complicated. I'm on my third advisor already and I've paid $12k so far in accountancy fees and legal advice. I'm going to do a "Donald Rumsfeld" and include a letter that I've spent 2 months of my life trying to figure this out and a paid a fortune in fees and I've no idea whether it's correct!

More seriously I'll see what structured product company says and if nothing useful I'm going to FBAR and 8893 it and I'll pay capital gains on maturity. They can tell me what I should have done if they audit me and I'll willingly do it, but it sounds like the IRS won't know either. If I get a penalty so be it.

Oh that was a bit of a rant wasn't it!

A

I agree that things are complicated and sympathize with your situation. So it's a learning opportunity for others to divest themselves of hazardous financial products prior to any move.

Researching in the morning after coffee leads me to believe these sort of structured products would be considered "Exchange traded notes" (ETN). According to two sources

<<An ETN offers a tax-efficient way to invest. It is treated as a prepaid contract (such as a forward contract) for tax purposes. The buyer of a prepaid contract pays an initial amount in order to receive a future payment based on the value of an index or other underlying benchmark at a specified future time.

Very often index mutual funds and ETFs are required to make yearly income and capital gains distributions to its fund holders that are taxable. When a fund is forced to sell stock to rebalance or otherwise change its composition, the fund holders have to pay any resulting capital gains tax.

With ETNs, in contrast, there is no interest payment or dividend distribution, which means there is no annual tax. Capital gain (or loss) is realized when an investor sells the ETN or it matures. Long-term capital gains are treated more favorably than short-term capital gains and interest in the US (> 1 year holdings are taxed at a capital gains rate of 20%). There is no way to avoid paying capital gains tax, but there can be great advantage in wealth building by delaying it.>>

Here's what Fidelity say, for example:
https://www.fidelity.com/learning-center/investment-products/etf/types-etfs-etns

and Barclays say the same thing.

So seems to me like FBAR, 8839, then capital gains tax on sale.

I've seen other resources which say there is no final decision yet - so what's one supposed to do when filing taxes if the IRS haven't decided?!! I suggest one takes a position and documents it.

A

Well this is a non-issue. After asking them how to account for US tax as I was filing a US tax return the provider insisted I sell it. Luckily even though it was cashed in early still had a 3% profit. I'll have to declare it for US 2016 - I'll declare the profit FBAR and 8938 - and ignore the rest…

A

Well this is a non-issue. After asking them how to account for US tax as I was filing a US tax return the provider insisted I sell it. Luckily even though it was cashed in early still had a 3% profit. I'll have to declare it for US 2016 - I'll declare the profit FBAR and 8938 - and ignore the rest…

A

As I said, these are not sold to US persons, so you will want the provider to treat as sold the day before you became a US person as it ceased to be available to you on that date, not today.  The provider will be interested in helping, as they have no desire to be SEC regulated.

Hey there,

Have you actually ever asked a provider to provide this information? All I ever get is "we are not tax specialists and suggest you contact a tax advisor".

A

Hey there,

Have you actually ever asked a provider to provide this information? All I ever get is "we are not tax specialists and suggest you contact a tax advisor".

A

Yes; they sold it to you. They are FCA regulated. Go through their formal complaint procedures.