Foreign mutual fund ownership by overseas US citizen

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Jive Turkey
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Foreign mutual fund ownership by overseas US citizen

Post by Jive Turkey » Tue Jun 17, 2008 10:31 pm

I've been a long-time lurker here and have usually managed to find answers to questions I've had by just searching the forums. There is one question, though, for which I've not been able to find an answer.

First a bit of context. I live in Hong Kong. I keep most of my portfolio at Vanguard in the US, but I am also a member by compulsion of a local Mandatory Provident Fund (MPF), which is a 401K type of retirement savings account. Like 401Ks in the US, there is an employer match up to a certain percent, and all the funds come with outrageous ERs and hidden fees. The only index fund on offer from any account custodians is the Hang Seng Index Fund, and it isn't available for anything lower than a 1.5% ER. The big difference between the MPF and a 401K is that the MPF is, as the name suggests, mandatory. I have tried a number of angles to opt out of the program, but none has worked so far. I and all the other US citizens I know have not been reporting any of our MPF gains to the IRS under the probably false hope that the IRS would treat MPF accounts like 401Ks.

Aside from the high ERs and lack of decent index funds, the thing that worries me most about having to participate in the MPF is owning foreign mutual funds. HSBC is the custodian of my account, and I have no idea if any of the funds that I can buy in my account are registered with the SEC. I've asked HSBC, and nobody can give me an answer. They don't seem to understand what I'm talking about or why I would ask. I haven't even begun to explore what kind of information I would need to get in order to properly report capital gains from these funds on my US tax forms, and I strongly doubt that I'd be able to get it from HSBC anyway.

What I want to know is if the IRS will hold a foreign resident US citizen who owns foreign mutual funds in a retirement account to the requirements for reporting capital gains for foreign mutual funds. I imagine the answer is yes. Has anyone here resided in a country that has a mandatory 401K-like retirement savings system (eg, Singapore and Australia) in which owning foreign mutual funds was unavoidable? If so, how if at all did you report capital gains to the US IRS?

BradMajors
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Post by BradMajors » Wed Jun 18, 2008 12:43 pm

There are restrictions on who can buy mutual funds, but these restrictions are based upon the residence of the buyer and not citizenship. If you live in Hong Kong there should not be any issues relating to the buying of Hong Kong mutual funds and whether or not they are registered with the SEC is irrelevant.

Unless there exists a tax treaty between the two countries, all gains and income in foreign retirement accounts are taxable. You need to find what the Hong Kong-United States tax treaty says on this subject (assuming a treaty exists). I am only familiar with the tax treatment of Canadian retirement accounts by United States citizens. The Canada-United States tax treaty says I can annually elect on my 1040 to postpone taxes on my Canadian retirement account, which I have been doing.

There shouldn't be a problem with reporting your annual gains in your retirement account on your 1040. Mutual funds make distributions during the tax year and these distributions are taxable. Now to determine if these distributions should be classified as dividends or capital gains will be more difficult.

bpp
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Re: Foreign mutual fund ownership by overseas US citizen

Post by bpp » Wed Jun 18, 2008 6:56 pm

Jive Turkey wrote:Has anyone here resided in a country that has a mandatory 401K-like retirement savings system (eg, Singapore and Australia) in which owning foreign mutual funds was unavoidable? If so, how if at all did you report capital gains to the US IRS?
No to the first question, but I think you are going to have to file Form 8621 with your tax return. You will probably want to take the option to declare gains mark-to-market, unless you can get the info needed for QEF treatment (doesn't sound likely from your description of dealings with them).

http://www.irs.gov/pub/irs-pdf/i8621.pdf
http://www.irs.gov/pub/irs-pdf/f8621.pdf

There doesn't seem to be any tax treaty between the US and Hong Kong, and the US-China treaty (if that applies to you), at quick glance, doesn't seem to mention anything about recognition or special treatment of retirement accounts. So this seems to be just a regular taxable account as far as the IRS is concerned.

Jive Turkey
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Post by Jive Turkey » Sun Jun 22, 2008 3:10 pm

Many thanks to both of you for your replies. Form 8621 is an interesting if tedious read, but it lists some requirements for filing that may yet serve as ammo for getting me out of the MPF altogether. It would seem that I should be able to report using the mark-to-market method. However, in the items under "Additional Information Required" for filing through any method on 8621, it states that I must attach a detailed record of any changes in the number of shares in each fund and the dates of the changes of every change. Yearly reports from MPF custodians are not this detailed, and judging from their replies to past requests for more information, such details will not likely be provided. Perhaps I'm too optimistic, but I'm hoping that I can plea with the MPF authority that my MPF custodian cannot give the information I need to properly file US income tax paperwork, and thus participation exposes me to severe penalties in my home country.

Jeha
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Post by Jeha » Sun Jul 27, 2008 7:56 pm

I'm an American citizen residing in Japan and am having difficulties understanding what is really legal and what is not in terms on investing options from abroad. I have a 401k with Fidelity with my employer that that I used to contribute to when stateside, but since moving to Japan they claimed that contributions had to be stopped. Apparently I can keep the account, just can't contribute to it. Oddly enough, when I tried to open a local Japanese account with Fidelity here in Japan, I got the following rejection reply (translated to English by myself):
"Reason why we cannot accept applications for persons with US citizenship is that if we were to offer our products which are not registered with the United States Securities and Exchange Comission (SEC) , to USA citizens there is a possibility that we would be in conflict with various US regulations.
The "Securities Act of 1933, 1940" which regulates the securities exchange in America, applies to US persons (living in the US), and as a US citizen living in Japan it does not apply to you, however; as a securities company registered with Japan's body of authority, the Financial Service Agency (Kin'yucho), we do not have suffficient knowledge or experience with US law."
I also have a number of mutual accounts with local brokers, who I now wonder if I can really legally have!!! Why would a US based company refuse my business, but not a local company?

The worst part of this, is that it appears that I cannot invest in the US markets due to the SEC regulations, and I cannot invest in the local markets! This just can't be right. Anyone know the actual law here?

Jeha

bpp
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Post by bpp » Sun Jul 27, 2008 10:59 pm

Jeha wrote:when I tried to open a local Japanese account with Fidelity here in Japan, I got the following rejection reply (translated to English by myself):
I have had the same conversation with Fidelity Japan, and a similar one with the Japanese branch of Citibank, except that the latter blamed the IRS instead of the SEC.
I also have a number of mutual accounts with local brokers, who I now wonder if I can really legally have!!! Why would a US based company refuse my business, but not a local company?
I think the problem with Fidelity and Citibank is that they do business in both the US and Japan. They do not want to run afoul of securities or tax laws in either country, so they prefer to avoid any case with murky or complicated jurisdiction. In the case of a local broker, the jurisdictional issues are clear -- you're either a resident of Japan or not, and they only have to answer to the Japanese authorities. If they did business in the US as well, they might also become skittish.
The worst part of this, is that it appears that I cannot invest in the US markets due to the SEC regulations, and I cannot invest in the local markets! This just can't be right. Anyone know the actual law here?
As far as I know, there is nothing illegal about you investing in either country. According the the SEC, they don't necessarily consider a US citizen who is not a resident of the US to be under their jurisdiction. So merely being a US citizen does not automatically make one a "US Person" in the eyes of the SEC.

The IRS, of course, is a different story, but even they have no legal prohibition against investing through a non-US broker. One nasty feature of US tax law, however, is the treatment of non-SEC-registered mutual funds as PFICs. If you are not familiar with this, you might want to check out the Form 8621 links I posted above. One way around this problem would be to invest in US-based ETFs through a Japanese broker. Rakuten, SBI, Nomura and Nikko Cordial are some brokers who offer US-based ETFs, and some may even start showing up on the Tokyo Stock Exchange soon as cross-listings.

In the US, Schwab Global seems to be one possibility, and some have reported luck opening accounts with Vanguard or Fidelity using a relative's US address, then filing a change-of-address to their Japanese address once the account is opened. Also, I wonder if part of your problem with Fidelity in the US might be that the account is a 401k, rather than a regular taxable account?

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tokyoleone
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Post by tokyoleone » Mon Jul 28, 2008 10:58 am

bpp wrote:
In the US, Schwab Global seems to be one possibility, and some have reported luck opening accounts with Vanguard or Fidelity using a relative's US address, then filing a change-of-address to their Japanese address once the account is opened. Also, I wonder if part of your problem with Fidelity in the US might be that the account is a 401k, rather than a regular taxable account?
Jeha: There is no reason why you cannot invest in US markets. I can confirm that what bpp says about opening a Vanguard account with a US address and then switching to a Japanese address is true. My address of record with Vanguard is now my Japan address. I used to have an account with Fidelity and it was the same.

Although you can't contribute to your 401k at Fidelity, you CAN contribute to a taxable account.

Jeha
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Post by Jeha » Mon Jul 28, 2008 11:09 pm

Thanks everyone for the replies.

I have just confirmed with Charles Schwab that they do have a "global account" that US citizens can join with a foreign address--- The only limitation is that you cannot contribute to mutual funds, but any of their other products are available (CDs, bonds, etc). I am still not sure why the mutual funds are an issue for them-- Does anyone know? After talking to them I started to wonder if ETFs are okay--- Seems strange that an ETF would be fine, but a mutal not okay.

Also I do already have an account with a smaller fund company (Wasatch) in the US that I did open while in Japan with a relatives US address. At that point I wasn't officially "relocated", but just "on assignment".

So that said, it appears there is still some reason why US firms will resist serving non-resident citizens, but that it is probably not "illegal", but rather leaves them with too many legal "unknowns". I suppose if you are dilligent in following the IRS rules there should not be a big issue with using a relatives address to set up US accounts... I'm still just a bit weary of putting big chunks of money someplace that could in the future cause some goverment to cry "fowl", take a huge chunk in penalties and delay my possible retirement!

Jeha

bpp
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Post by bpp » Tue Jul 29, 2008 8:50 am

Jeha wrote:I have just confirmed with Charles Schwab that they do have a "global account" that US citizens can join with a foreign address--- The only limitation is that you cannot contribute to mutual funds, but any of their other products are available (CDs, bonds, etc). I am still not sure why the mutual funds are an issue for them-- Does anyone know? After talking to them I started to wonder if ETFs are okay--- Seems strange that an ETF would be fine, but a mutal not okay.
Beats me, but I have heard of other brokers having the same restriction on mutual funds, but not on ETFs.

Just a guess, but maybe mutual funds, which are sold directly to customers, are only licensed for sale to residents of certain places, whereas ETFs, which are traded on the open market, don't have that restriction because it would be impractical to enforce?

bengt
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Post by bengt » Tue Jul 29, 2008 10:12 am

Financial institutions in foreign countries refuse to serve US citizens or US residents because they fear (rightly or wrongly) that it would require full compliance with various SEC/IRS rules and it is just easier for them not to deal with US citizens. Just not worth the hassle for them.

Still, it should be ok if you manage to do it. Filling your US (and foreign)tax returns may be a bit challenging, but otherwise you should be ok.

Tax treaties are written in legal jargon and it is very difficult to understand what they actually mean.

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Vig Oren
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seek a tax attorney

Post by Vig Oren » Wed Jul 30, 2008 12:46 pm

Jive, may I suggest that you contact either a US consul there or a Hong Kong here in the US, and ask for names of tax attorneys who deal with such matters.

While living overseas (being a US dual national) I have consulted with a tax attorney who was registered there and also in a state here in the US. He was making a living advising US citizens residing there. Besides the issues with the tax treaties, there are countries that tax by residency while the US taxes by citizenship. It gets to be quite complex.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ | "One of the greatest piece of economic wisdom is to know what you do not know"{John Galbraith}

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