Source: https://www.castroandco.com/blog/2019/december/u-s-tax-treatment-of-slovak-old-age-pension-savi/
Timestamp: 2020-01-22 01:28:33
Document Index: 335363681

Matched Legal Cases: ['Art. 1', 'Art. 1', 'Art. 1', 'Art. 19', '§ 301', '§ 301', '§ 1', '§ 1010']

U.S. Tax Treatment of Slovak Old Age Pension Savings Individual Retirement Accounts | Castro & Co.
U.S. Tax Treatment of Slovak Old Age Pension Savings Individual Retirement Accounts
Income within and distributions from a Slovak Old Age Pension Savings Individual Retirement Account in Slovakia are exempt from U.S. tax pursuant to the U.S.-Slovak Republic Income Tax Treaty if and only if the benefits of the treaty are properly claimed and reported on your U.S. federal income tax return. Contact our firm today to schedule a free consultation by clicking here to submit your information online and be contacted by our firm.
The Slovak Social Security System
The U.S. Social Security Administration’s 2010 publication titled “Social Security Programs Throughout the World” analyzes the Slovak Republic’s overall comprehensive social security system. The first of laws implementing social security in Slovakia were enacted in 1906 for salaried employees and 1924 for wage earners.
Slovakia’s current social security system is based on Act on Funeral Grant No. 238 of 1998, Act on Social Insurance No. 461 of 2003 implementing social insurance, Act on Employment Services No. 5 of 2003, and Act on Old-Age Pension Saving No. 43 of 2004 implementing individual accounts. These laws are all similar to compulsory contributions under the U.S. Federal Insurance Contributions Act.[6] The two programs are the Universal (funeral grant) Program and the Social Insurance and Individual Account System.
The Universal (funeral grant) Program system covers all residents of Slovakia. The Social Insurance and Individual Account System covers employed and self-employed persons with annual earnings greater than 12 times the minimum monthly assessment basis. The minimum monthly assessment basis is €456. Voluntary coverage is available. There are special systems for certain intelligence, security, police, fire, customs, and military personnel.
Slovak Old Age Pension Savings Individual Retirement Accounts can most aptly be characterized as state-mandated individual accounts with the primary purpose of providing for income at retirement, and it is specifically recognized as social security by the U.S. Social Security Administration.[7] Furthermore, the International Social Security Association, of which the Slovak Republic and the United States are members, also recognizes Slovak Old Age Pension Savings Individual Retirement Accounts as forming part of Slovakia’s overall comprehensive social security system.[8]
Therefore, based on the foregoing substantial and compelling authorities, it is indisputable that Slovak Old Age Pension Savings Individual Retirement Accounts are social security accounts forming a part of Slovakia’s overall comprehensive social security system.
The U.S.-Slovak Republic Social Security Totalization Agreement
Moreover, the United States signed the Totalization Agreement with the Slovak Republic that went into effect on May 1, 2014, specifically recognizes Slovak Old Age Pension Savings Individual Retirement Account contributions as being social security contributions since the funds are part of the Slovak Republic’s larger, comprehensive national social security system.[9] In essence, by covering Slovak Old Age Pension Savings Individual Retirement Account contributions under the U.S.-Slovak Republic Social Security Totalization Agreement, U.S. federal law recognized that Slovak Old Age Pension Savings Individual Retirement Accounts are privatized social security accounts.
Cooperation and Development (“OECD”) when a treaty was drafted, U.S. courts are legally bound to mandatorily refer to OECD commentary, which is published every four years, to interpret terms in that income tax treaty.[10] The United States joined the OECD in 1961 while the Slovak Republic joined in 2000. The U.S.-Slovak Republic Income Tax Treaty was signed and went into effect in 1993. Therefore, U.S. courts are legally bound to defer to the OECD with regard to interpreting treaty terms, which promotes international consistency.
According to the OECD, the term “social security” generally “refers to a system of mandatory protection that a State puts in place in order to provide its population with… retirement benefits.”[11] However, the OECD Model Income Tax Treaty does not specifically cover social security; it merely suggests that “payments under a social security system… could fall under Article 18, 19 or 21,” which reference pensions from government service, private sector service, or other income, respectively.[12] On the other hand, the U.S.-Slovak Republic Income Tax, unlike the OECD Model Income Tax Treaty, does specifically have a provision addressing taxing rights with regard to social security. Nevertheless, the OECD commentary broadly interprets “payments under a social security system” to include payments under a “worker’s compensation fund,” which is not considered “social security” in the United States, which is proof that the United States’ definition of “social security” is not the controlling factor.
Although some practitioners have asserted that Slovak Old Age Pension Savings Individual Retirement Accounts are reportable as foreign grantor trusts on IRS Forms 3520 and 3520-A, doing so would subject the gains within the fund to immediate U.S. taxation, which is contrary to IRS guidance.[17] However, because gains will still be subject to U.S. taxation at maturity of the Slovak Old Age Pension Savings Individual Retirement Accounts based on disability or retirement, one must still consider the application of the U.S.-Slovak Republic Income Tax Treaty and the outcome thereunder.[18]
Under Article 19, Paragraph 1(b), of the U.S.- Slovak Republic Income Tax Treaty, “social security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.” In other words, the country of source has exclusive taxing rights to social security income. With regard to a Slovak Old Age Pension Savings Individual Retirement Account, Slovakia would have exclusive taxing rights to the income.
With regard to treaty claims by U.S. citizens and U.S. tax residents, however, one must consider the application of the Saving Clause, which allows the United States to “tax its residents… [and] citizens as if this Convention had not entered into force.”[19] Put plainly, the U.S. may disregard most treaty claims made by U.S. citizens and U.S. tax residents. It should be noted that the Saving Clause is merely a reserved right and does not automatically apply to prevent claims by U.S. citizens and U.S. tax residents.[20] The Saving Clause, however, has a few specifically enumerated exceptions; one of which is claims by made U.S. citizens and U.S. tax residents pursuant to Article 19, Paragraph 1(b), which covers social security gains and reserves exclusive taxing rights to the country of source.[21] Therefore, the Saving Clause is inapplicable to claims by U.S. citizens and U.S. tax residents with regard to gains, distributions, or any other income associated with a Slovak Old Age Pension Savings Individual Retirement Account. Even the plain language of Article 19, Paragraph 1(b), unmistakably allows U.S. citizens to make claims under that provision.[22]
There are several items for which reporting is specifically waived.[27] A position by a taxpayer that a treaty reduces or modifies the taxation of income from social security or other public pensions is exempt from disclosure regardless of the amount.[28]
Furthermore, payments or the rights to receive social security benefits, the foreign equivalent of social security, or another similar program of a foreign government are not specified foreign financial assets subject to reporting on IRS Form 8938 or FinCEN Form 114.[29]
In conclusion, Slovak Old Age Pension Savings Individual Retirement Accounts are covered under Paragraph 1(b) of Article 19 as privatized individual social security accounts that are exclusively taxable in the country of source, Slovakia. As such, it is properly excludible from their U.S. tax return with proper disclosure on IRS Form 8833.
Bluebook Citation: John Anthony Castro, U.S. Tax Treatment of Slovak Old Age Pension Savings Individual Retirement Accounts, Castro Int’l Tax Blog (Dec. 5, 2019) url.
[8] See Social Security Country Profiles, International Social Security Association, https://www.issa.int/countrydetails?countryId=SK&regionId=EUR.
[9] Totalization Agreement with the Slovak Republic.
[17] If Slovak Old Age Pension Savings Individual Retirement Accounts were foreign pension plans, they would certainly be subject to reporting on IRS Forms 3520 and 3520-A. However, being social security, they are not subject to reporting since they constitute foreign social security, which is taxable in the same manner as an annuity in accordance with IRS Publication 17.
[19] See U.S.- Slovak Republic Income Tax Treaty, Art. 1, ¶ 3.
[20] See Technical Explanation of the U.S.- Slovak Republic Income Tax Treaty, Art. 1, ¶ 3.
[21] See U.S.- Slovak Republic Income Tax Treaty, Art. 1, ¶ 4(a).
[22] “Social security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.” U.S.- Slovak Republic Income Tax Treaty, Art. 19, ¶ 1(b).
[27] See Treas. Reg. § 301.6114-1(c)(1)-(8).
[28] See Treas. Reg. § 301.6114-1(c)(1)(iv).
[29] See Treas. Reg. § 1.6038D-3; 31 C.F.R. § 1010.350; also see “FATCA – FAQs General,” Internal Revenue Service, http://www.irs.gov/Businesses/Corporations/Frequently-Asked-Questions-FAQs-FATCA--Compliance-Legal (Sep. 1, 2015).