- 1 Brazilian Mutual Funds & US Tax Implications
- 2 Worldwide Income & Brazil Mutual Funds
- 3 PFIC of Brazil Mutual Funds
- 4 Types of Funds in Brazil
- 5 Accrued vs Distributed Income
- 6 Excess Distributions of Brazilian Mutual Funds
- 7 Foreign Investments Amnesty Program Summary
- 8 Can I Just Start Reporting Brazilian Mutual Funds This Year Instead?
- 9 Our International Tax Lawyers Represent Clients Worldwide
Brazilian Mutual Funds & US Tax Implications
Brazilian Mutual Funds Lead to US Tax Obligations: Each year, the International Tax Lawyers at Golding and Golding represent Taxpayers across the globe who have mutual funds — and other investment funds — in Brazil. Common investment companies in Brazil include Vanguard Brazil Mutual Funds, HSBC Brazil Mutual Funds – and iShares Brazil. Since the tax rules for investment income in Brazil are different than they are in the United States, it can come as a big shock to Taxpayers who are US Persons (including Lawful Permanent Residents and certain Visa Holders) and have investments in Brazil such as Mutual Funds, ETF’s and other types of equity funds. Due to all the misinformation and fear-mongering on the world wide web regarding the taxation of Brazilian mutual funds by less experienced international tax counsel — our Board-Certified Tax Law Specialist team wanted to provide some introductory insight into how Brazilian mutual funds are taxed in the United States.
Worldwide Income & Brazil Mutual Funds
From a baseline perspective, the United States taxes US persons on their worldwide income. Therefore, when a person is either a US Citizen,Lawful Permanent Resident, or Foreign National who meets the Substantial Presence Test they will be taxed on their worldwide income — which would include Brazilian mutual funds and other investment funds.
PFIC of Brazil Mutual Funds
PFIC refers to Passive Foreign Income Company. It involves ownership of a foreign company (including mutual and other equity funds). When a PFIC is involved, the IRS is most concerned that income may be generated without the IRS being able to track the information necessary to impute the income to the Taxpayer – and therefore, the IRS puts the burden on the Taxpayer to explain and calculate the income tax. In addition, the Taxpayer has to pay taxes on foreign mutual income at a higher tax rate.
Types of Funds in Brazil
There are various different types of mutual funds in Brazil. Whether or not the funds are value or growth, will impact the tax implications and how the tax rules. For example, the growth in value of the fund is generally not taxable. In addition, accrued income within the fund is usually not taxable until distributed. But, once income is distributed or the fund is redeemed or switched-out, then the tax implications arise (even without any actual tax liability, reporting is still required on FBAR, FATCA and/or Form 8621)
Accrued vs Distributed Income
In general, whether the income is accrued or distributed – it is still taxable in the United States at the time it generates the income. But, when foreign mutual funds are involved, there may be some delay on the tax treatment — because it typically will fall into the category of PFIC. Yet, even though there may be some delay in the tax implications of the Brazilian mutual fund — in general the tax rates for mutual funds are going to be higher than other types of passive investments. When excess distributions are involved, the tax rate is at whatever rate is the highest income tax rate available under the US tax code for income during the compliance period– and the fund income does not receive the benefit of Long-Term Capital Gain or Qualified Dividend treatment. That is because not only is it PFIC, but because of the way most mutual funds payout — including redemption or switch-outs — leads to the income being categorized as an excess distribution or progressive tax rate scenario (absent making a timely election).
Excess Distributions of Brazilian Mutual Funds
When it comes to Brazilian mutual funds, the biggest headache becomes when the mutual fund issues income that is considered an excess distribution. When the Brazilian mutual fund issues distributions that are considered excess distributions — the US tax liability can be significant, and the implications can be far-reaching over several years of tax returns. Therefore, if a Taxpayer invests in Brazilian Mutual Funds and they are out of compliance for prior years’ tax and reporting they may want to consider one of the amnesty programs.
Foreign Investments Amnesty Program Summary
The International Tax Amnesty Programs are programs developed by the Internal Revenue Service to assist Taxpayers who are already out of compliance for non-reporting.
Some of the more common programs, include:
- Voluntary Disclosure Program (VDP or “New” OVDP)
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
- Delinquency Procedures
- Reasonable Cause
Can I Just Start Reporting Brazilian Mutual Funds This Year Instead?
No, unless the current year is the first-year you had a Reporting requirement. If you had a prior year reporting requirement, but only begin to start filing in the current year (Filing Forward) it is illegal. In the world of offshore disclosure, this is referred to as an Quiet Disclosure. The IRS has warned taxpayers that if they get caught in a Quiet Disclosure situation, it may lead to willful penalties and even a criminal investigation by the IRS Special Agents.
Our International Tax Lawyers Represent Clients Worldwide
Our International Tax & Legal team specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.