Alert
Alert
03.18.10
On March 18, 2010, President Obama signed the Hiring Incentives to Restore Employment Act (the “Act”), which hopes to create jobs with measures such as a “Social Security holiday” for employers that hire previously unemployed workers, an extension of highway and mass transit funding, and an expansion of the Build America Bonds program. The cost of the Act is budgeted to be offset, in part, by a slightly modified version of the previously proposed Foreign Account Tax Compliance Act of 2009 (FATCA), which is intended to combat offshore tax evasion through increased information reporting and tax withholding requirements in a variety of common situations involving offshore payees and accounts beneficially owned by U.S. persons. The provision is expected to raise $8.7 billion over 10 years. Following is a summary of certain of the FATCA provisions which are included in the Act.
Increased Disclosure of Beneficial Owners
Subject to a grandfathering provision which exempts payments on, and the gross proceeds from the disposition of, obligations which are outstanding on March 18, 2012, any “withholdable payment” made after December 31, 2012 to a “foreign financial institution” (including affiliates) will, in general, be subject to a 30% U.S. withholding tax unless the foreign financial institution agrees to comply with certain requirements, including:
The foregoing rules will not apply to any payment beneficially owned by certain exempt payees, including any foreign government, any international organization or any foreign central bank of issue.
Subject to a grandfathering provision which exempts payments on, and the gross proceeds from the disposition of, obligations which are outstanding on March 18, 2012, any withholdable payment made after December 31, 2012 to a “non-financial foreign entity” will be subject to 30% withholding if the beneficial owner of such payment is such entity or any other non-financial foreign entity unless (i) the payee or the beneficial owner of the payment provides (A) certification that such beneficial owner does not have any substantial U.S. owners or (B) the name, address and TIN of each substantial U.S. owner of such beneficial owner, (ii) the withholding agent does not know, or have reason to know, that any information provided pursuant to item (i) is incorrect, and (iii) the withholding agent reports the information provided under item (i)(B). Except as otherwise provided by the Secretary, the foregoing rules will not apply to any payment beneficially owned by certain exempt payees, including a corporation the stock of which is regularly traded on an established securities market or any affiliate of such corporation, any entity which is organized under any possession of the U.S. and wholly owned by one or more residents of such possession, any foreign government, any international organization or any foreign central bank of issue.
The Act introduces several new and significant terms into the Internal Revenue Code, some of which are surprisingly defined and the most salient of which are described below.
Further Limitations on Bearer Bonds
The Act denies a deduction for interest paid on foreign-targeted bearer bonds and makes interest paid on them ineligible for the portfolio interest exemption from the 30% U.S. withholding tax required on interest paid to foreign persons in the absence of treaty protection. The Act maintains the exemption from the excise tax imposed by section 4701(b) of the Internal Revenue Code on foreign-targeted bearer bonds. The Act is effective for bearer bonds issued after March 18, 2012.
Enhanced PFIC Reporting
Except as otherwise provided by the Secretary, the Act requires any U.S. shareholder in a passive foreign investment company (PFIC) to file an annual report containing such information as the Secretary may require. Under previous law, annual reporting on IRS Form 8621 only applied if the U.S. person received a distribution from, or disposed of its interest in, the PFIC, or made certain elections with respect to its interests in the PFIC. The enhanced PFIC reporting is effective beginning March 18, 2010.
Substitute Dividends and Dividend Equivalent Payments Received by Foreign Persons Treated as Dividends
With respect to payments made on or after 180 days after March 18, 2010, the Act treats “dividend equivalents” as U.S. source dividends, subjecting dividend equivalents paid to foreign persons to a 30% U.S. withholding tax in the absence of treaty protection or other exemption. A dividend equivalent is any substitute dividend made pursuant to a securities lending transaction or a sale-repurchase agreement, any payment made pursuant to a specified notional principal contract that is directly or indirectly contingent on, or determined by reference to, the payment of a U.S. source dividend or any other payment determined by the Secretary to be substantially similar to the such payments. A specified notional principal contract is any notional principal contract, if:
In the case of any payment made after March 18, 2012, any notional principal contract will be treated as a specified notional principal contract unless the Secretary determines the contract is of a type which does not have the potential for tax avoidance.
Download: President Signs HIRE Act, Including FATCA Provisions Combating Offshore Tax Evasion