Why is this Topic Important to Wealth Managers? Continues the discussion on what FATCA is and how it will affect clients including a number of topics of current interest with regards to this new legislation.

The Federal Government has estimated that the “United States loses an estimated $345 billion in tax revenues each year as a result of offshore tax abuses primarily from the use of concealed and undeclared accounts held by U.S. taxpayers or their controlled foreign entities.” [1]

In consideration of the goal of eliminating this gap, “it is not surprising that the government recently ratcheted up its pressure on taxpayers who structured their activities, in many cases, with the active help and assistance of promoters and facilitators to avoid reporting their taxable income on their tax returns or hide these offshore accounts from the government.” [2] This increased “pressure” came in the form of the HIRE Act passed in the first quarter of 2010. [3]

As was discussed earlier this week,[4] the new law provides for reporting requirements by foreign financial institutions with U.S. accountholders about the status, specifically identity and balance, of their account. [5]

“The touchstone of the new law is to impose upon a foreign financial institution a 30-percent withholding tax if it fails to provide the information required under the so-called ‘Code Sec. 1471(b)’ agreement.” [6] The agreement is between a foreign financial institution and the IRS which states the financial institution will comply with reporting requirements generally regarding U.S. taxpayers and the IRS will not enforce a 30% withholding tax on payments by U.S. persons to the financial institution. [7]

A foreign financial institution means a foreign entity that (i) accepts deposits in the ordinary course of a banking or similar business; (ii) holds financial assets for the account of others as a substantial portion of its business; or (iii) is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities interests in partnerships, commodities or any interest (including a futures or forward contract or option) in such securities, partnership interests or commodities. [8] This broad definition includes not only traditional banks, but could also include but is not necessarily limited to, insurance companies, investment trusts, mutual funds, hedge funds and pension plans. [9]

“The idea behind the new regime is to coerce foreign financial institutions to report information about their U.S. customers and account holders to the IRS.” [10] To avoid the withholding tax by the U.S. withholding agent on payments made to foreign financial institutions, “a foreign financial institution can elect to comply with ‘Form 1099’ reporting after applying the assumption that each account holder who is a specified U.S. person or a U.S.-owned foreign entity is a U.S. citizen.” [11]

Interestingly, because information disclosure and compliance is sought from international financial entities that themselves may not be subject to U.S. law or tax, “the information reporting cannot be mandated in a rule of law but must be incentivized”, and hence the 30% withholding, which occurs for non complying foreign financial institutions at the U.S. source by the withholding agent (who are subject to U.S. law and tax). [12]

Moreover, the new law provides that “a withholding agent will be required to withhold 30 percent” from most payments made to “a nonfinancial foreign entity that fails to obtain from the beneficial owner or the payee a certification that the beneficial owner does not have any substantial U.S. owners, or otherwise satisfies the information reporting requirements”. [13] This obligation of the new law, like that to foreign financial institutions, “is intended to require a nonfinancial foreign entity receiving U.S.-source income to report information about its beneficial owners to the IRS.” [14]

Commentators are now suggesting that the above described, incentivized, “‘foreign tax piggy-back legislation’ can be just as invasive as the U.S. model.” [15] In other words, since the U.S. is now asking to know the identities and account balances of Americans that own U.S. accounts, a foreign financial institution will have to know whether or not its accounts are owned by U.S. persons, or if the intended beneficiaries are U.S. persons.  “To that end, [foreign entities] will be asking global account owners to certify or provide documentation acceptable to the Treasury whether they are specified U.S. persons.” [16]

Tomorrow’s blogticle will continue the discussion of international tax compliance.

We invite your questions and comments by posting them below, or by calling the Panel of Experts

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[1] CCH. Taxes—The Tax Magazine. July 2010. At 28. Citing, Update on Reducing the Federal Tax Gap and Improving Voluntary Compliance, U.S. Department of the Treasury, July 8, 2009; U.S. Senate, Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, Tax Haven Banks and U.S. Tax Compliance, Staff Report (July 17, 2008).

[2] CCH. Taxes—The Tax Magazine. July 2010. At 28

[3] Hiring Incentives to Restore Employment Act. H.R. 2847. 2010. (available: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h2847enr.txt.pdf)

[4] AdvisorFYI: How Foreign Account Tax Compliance Act May Impact Your Business and Clients

[5] See generally Section 1471. HIRE Act. H.R. 2847. 2010.

[6] CCH. Taxes. At 40.

[7] See generally Section 1471. HIRE Act.

[8] Section 1471(d)(5). HIRE Act.

[9] Deloitte Touche Tohmatsu. Aisa Pacific Dbref- U.S. FATCA Requirements.  October 2010.

[10] CCH. Taxes. At 40.

[11] Id.

[12] Id. at 41.Citing, New York State Bar Association Tax Section comments dated January 10, 2010, entitled, Comments on the Foreign Account Tax Compliance Legislation (hereinafter “NYSBA Tax Section Comments”).

[13] CCH. Taxes. At 41.

[14] Id.

[15] Id.

[16] Id.

Tags: account holders, Barack Obama, FATCA, Federal government of the United States, Financial institution, Foreign Account Tax Compliance Act, foreign financial institution, HIRE, Hiring Incentives to Restore Employment Act, Incentive, Internal Revenue Service, IRS tax forms, Law, Tax, taxpayers. Asset, United State, United States, Withholding tax

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