Congress Passes Jobs Bill Creating New Reporting and Taxing Regime for Foreign Financial Institutions
Congress has passed and sent to the President the Hiring Incentives to Restore Employment Act (HIRE), HR 2847, creating a vast new reporting and taxing regime for foreign financial institutions with U.S. accountholders. The House passed the bill on March 4, 2010 by a vote of 217-201. Yhe Senate passed the bill on March 17, 2010 by 68-29. Under Title V, the Foreign Account Tax Compliance Act, the legislation casts a wide net in search of undisclosed accounts and hidden income. It adds a new Chapter 4 to the Internal Revenue Code, essentially requiring foreign financial institutions to identify their customers who are U.S. persons or U.S.-owned foreign entities and then report to the IRS on all payments to, or activity in the accounts of, those persons. Participation in the existing Treasury Qualified Intermediary program will not exempt a firm from the new reporting obligations.
The legislation’s principal focus is tax compliance by U.S. persons that have accounts with foreign financial institutions. The Act imposes substantial new reporting and tax-withholding obligations on a broad range of foreign financial institutions that could potentially hold accounts of U.S. persons. The reporting and withholding obligations imposed on the foreign financial institutions will serve as a backstop to the existing obligations of the U.S. persons themselves, who have a duty to report and pay U.S. tax on the income they earn through any financial account, foreign or domestic.
These new reporting obligations for financial institutions will be enforced through the imposition of a 30-percent U.S. withholding tax on a wide range of U.S. payments to foreign financial institutions that do not satisfy the reporting obligations.
The legislation provides substantial flexibility to Treasury and the IRS to issue regulations detailing how the new reporting and withholding tax regime will work. It also gives Treasury broad authority to establish verification and due-diligence procedures with respect to a foreign financial institution’sidentification of any U.S. accounts.
New Chapter 4 also provides for withholding taxes as a means to enforce new reporting requirements on specified foreign accounts owned by specified U.S. persons or by U.S.-owned foreign entities. The provision establishes rules for withholdable payments to foreign financial institutions and for withholdable payments to other foreign entities. The Act will essentially present foreign financial institutions, foreign trusts and foreign corporations with the choice of entering into agreements with the IRS to provide information about their U.S. accountholders, grantors and owners or becoming subject to 30-percent withholding.
The legislation will increase the disclosure of beneficial ownership. As a tax enforcement tool, U.S. financial institutions must file annual information returns disclosing and reporting on the activities of bank accounts held by U.S. individuals. Congress believes that many Americans looking to evade their tax obligations in the United States have sought to hide income and assets from the IRS by opening secret foreign bank accounts with foreign financial institutions.
The HIRE Act defines “foreign financial institution” broadly to include many securities firms and investment vehicles. Firms meeting the definition must enter into agreements with the IRS and report information annually in order to avoid a new U.S. withholding tax on U.S.-source dividends, interest and other income, as well as U.S.-related gross proceeds. The Act also imposes related reporting and tax withholding requirements in respect of payments made to non-financial foreign entities.
The reach of the legislation goes beyond traditional financial institutions and covers virtually every type of foreign investment entity. The Act broadly defines foreign financial institution to comprise not only foreign banks but also any foreign entity engaged primarily in the business of investing or trading in securities, partnership interests, commodities or any derivative interests therein. According to the Joint Committee on Taxation, investment vehicles such as hedge funds and private equity funds will fall within this definition. The new regime also covers fund entities and fund managers who are not currently within the scope of the Qualified Intermediary program.