Expatriates doing business in Asia have to contend with local financial reporting requirements in their foreign countries of residence including personal income tax reporting and, where applicable, business income resulting from their operation of a foreign-registered company. Depending on the jurisdiction, these requirements may either be straightforward and uncomplicated, or cumbersome and convoluted; it can sometimes be a lot to deal with. But it’s important that while doing so, expatriates not overlook any attendant reporting requirements back in their home countries. Although most countries around the world exclude foreign-sourced income from their citizens’ reporting requirements, certain others (most notably the United States) have altogether different requirements that must not be overlooked.
U.S. citizens and permanent residents, for example, are required to report all of their annual worldwide income on a U.S. tax return. Income is defined by the Internal Revenue Service to include wages, salaries, received rents, tips, interests, dividends, and other taxable income wherever earned, anywhere in the world. Failure to report income can result in penalties usually ranging from 20-25% on top of the taxes due on the unreported income. At the same time, U.S. taxpayers receive credits for any taxes they may have paid in other countries. Income is typically reported to the IRS by means of its Form 1040. In addition to federal returns filed with the IRS, U.S. citizens will in most cases also need to file state income tax returns.
Another requirement facing U.S. taxpayers since 2011 goes to reporting financial assets located overseas. In addition to an annual Foreign Bank Account Report (FBAR) identifying all foreign bank accounts for which the taxpayer has ownership or signing authority whenever the aggregate value of those accounts exceeds USD 10,000, the Foreign Account Tax Compliance Act (FATCA) also requires specified taxpayers with certain foreign assets exceeding specified thresholds to report those assets to the IRS on Form 8938. Assets required for disclosure include foreign bank accounts, accounts held by foreign financial institutions for investment purposes, foreign securities, interests in foreign entities such as partnerships, LLCs, or corporations, interests in foreign equity or hedge funds, or pooled investment funds.
Failure to comply with either of these requirements can incur significant penalties of up to USD 60,000 for FATCA noncompliance under certain circumstances, while the penalty for a non-willful failure to file an FBAR is USD 10,000 per year, per unreported account.
Finally, U.S. persons who have at least a 10% interest in a controlled foreign corporation, which is a corporation in which more than 50% of the vote and value is owned by U.S. shareholders that own at least 10%, must also file an annual Form 5471. This form is similar in substance to a Schedule C (Form 1040) used to report income or loss from a U.S.-based business operated or profession practiced as a sole proprietorship. The penalty for failing to file Form 5471 is USD 10,000 per entity, per year.
Given the foregoing, a U.S. expatriate running a business in Asia, say a cannabis dispensary in Thailand, would therefore have extensive tax reporting obligations imposed upon them in the United States, in addition to any personal or business income tax reporting due in Thailand. A qualified consultant can help ensure that global taxpayers, regardless of their home countries, know what’s expected of them and stay compliant.
(c) 2023 Frank Rittman
