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September 8, 2023
2023-1496

Puerto Rico's Treasury Department issues guidance on reporting foreign financial
accounts for individuals

 * Certain individuals must report foreign financial accounts, including those
   with crypto assets.
 * Failure to comply with the reporting requirement could result in penalties
   and a misdemeanor charge.

The Puerto Rico Treasury Department (PRTD) issued guidance (Administrative
Determination (AD) 23-03) on the obligation to report foreign financial
accounts, including calculating the maximum amount in a foreign financial
account and clarifying the definition of crypto assets.

Calculate maximum

To calculate the maximum value a foreign financial account had during the
calendar year, taxpayers should first determine the maximum value of the account
in the functional currency of that account. If there is more than one foreign
financial account, taxpayers should determine the maximum value of each account
separately. If an account has non-cash assets or a combination of cash and
non-cash assets, taxpayers should make a good faith approximation of the highest
value during the calendar year. Taxpayers can use the account or bank statements
to determine the maximum value of the assets in the foreign financial account
during the tax year.

After determining the maximum value in functional currency, taxpayers should
convert that amount to US dollars. To convert to US dollars, taxpayers should
use the exchange rates published by the US Treasury Department's Financial
Management Service on the last day of the calendar year. If the Financial
Management Service does not publish rates for the functional currency of the
foreign financial account, taxpayers should use the exchange rate of the
recognized market. Taxpayers who use the exchange rate of the recognized market
should maintain records as evidence of the rate used in case the PRTD requests
the information.

If a taxpayer cannot determine the foreign financial account's maximum value,
the taxpayer should complete the "Annex Foreign Financial Account" to report
that the taxpayer is unable to determine the value. The taxpayer should keep
records showing the reasons the taxpayer was unable to determine the value.

Crypto assets

AD 23-03 clarifies that "crypto assets" means all digital goods or rights for
which blockchain is used to verify transfers or maintain records. "Crypto
assets" include crypto currency, virtual currency, stablecoins and nonfungible
tokens. An account with crypto assets will be treated as a foreign financial
account, unless the account is maintained on an exchange or by a custodian
regulated by the US Government. "Wallets" (cold or hot storage) are foreign
financial accounts unless they are "guarded" by the taxpayer or a third party in
Puerto Rico or the United States.

If an account is maintained on (1) an exchange not regulated by the United
States or (2) a decentralized exchange, the taxpayer should report the account
on the "Annex Foreign Financial Account."

To determine the maximum value of the account with the crypto assets, taxpayers
should use the procedure for calculating the maximum value of a foreign
financial account. Taxpayers should convert the highest value of the crypto
assets during the tax year to US dollars by using the conversion value of the
assets shown on an exchange regulated by the US Government at 11:59 pm in Puerto
Rico on December 31 of the year in which the taxpayers must report the account.
If the taxpayer uses an exchange that does not provide a value at that time, the
taxpayer may use the value at the closing time of the exchange used. If the
assets are not found on an exchange regulated by the US Government, the taxpayer
should use an exchange recognized at the international level. The taxpayer
cannot use a decentralized exchange to determine the value of the assets.

Taxpayers should report crypto assets that cannot be converted to US dollars on
the "Annex Foreign Financial Account."

Other provisions

AD 23-03 includes guidance on how married taxpayers should report foreign
financial accounts. It also includes guidance on how to report foreign financial
accounts for minors. Additionally, AD 23-03 lists the accounts that are not
considered foreign financial accounts and clarifies that accounts maintained in
US possessions or in financial institutions on military bases will not be
treated as foreign financial accounts. Moreover, accounts where the taxpayer
only has power to sign, without having a financial interest, are not considered
foreign financial accounts when that authority is exercised as an officer or
employee of the legal entity in which it does not have participation as an
owner.

Generally, legal entities are not required to report foreign financial accounts.
AD 23-03 clarifies when the reporting requirement applies to a legal entity.

Implications

The obligation to report foreign financial accounts was introduced under Act 52
of June 30, 2022. AD 23-03 provides welcome guidance on critical compliance
aspects of this new requirement as well as types of accounts that are not
subject to the reporting requirement.

Puerto Rico resident individuals with accounts held outside of Puerto Rico or
the United States with a balance over $10,000 during the tax year are advised to
pay close attention to this new requirement, as failure to comply could result
in steep penalties and a misdemeanor charge.

———————————————

Contact Information
For additional information concerning this Alert, please contact:
 

State and Local Taxation Group   • Rosa M. Rodríguez (rosa.rodriguez@ey.com)   •
Pablo Hymovitz Cardona (pablo.hymovitz@ey.com)   • María T. Riollano
(maria.riollano@ey.com)   • Alberto J. Rossy (alberto.rossy@ey.com)   •
Alexandra M. Pérez (alexandra.perez@ey.com)   • Carla J Diaz
(carla.j.diaz@ey.com)   • Karol I. Santiago (karol.santiago@ey.com)   • Marcel
Ramos (marcel.ramos1@ey.com)   • Isabel Rivera (isabel.rivera@ey.com)   • Noeliz
Suarez (noeliz.suarezarchilla@ey.com)   • David Montanez-Miranda
(david.montanez-miranda@ey.com)   • Luz Grycell Rivera
(LuzGrycell.Rivera@ey.com)

Published by NTD’s Tax Technical Knowledge Services group; Jennifer A
Brittenham, legal editor

 



 


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