The jobs bill signed by President Obama on Thursday includes various revenue-raising provisions that would put foreign financial institutions with U.S. taxpayers under a new reporting and tax regime.
The legislation would create a broad new reporting and taxing regime for foreign financial institutions with U.S. accountholders, said CCH principal securities law analyst Jim Hamilton.
The Hiring Incentives to Restore Employment, or HIRE, Act will essentially present foreign financial firms with the choice of entering into agreements with the IRS to provide information about their U.S. accountholders or becoming subject to 30-percent withholding tax (see Obama Signs Bill to Provide Tax Cuts for Hiring).
A briefing written by Hamilton notes that the reach of the legislation goes beyond traditional financial institutions and covers virtually every type of foreign investment entity, including hedge funds, private equity funds and typical offshore securitization vehicles that hold U.S. assets and issue their own equity and debt securities, such as collateralized debt obligation issuers.
The legislation includes a set of measures to reduce offshore tax noncompliance by giving the IRS new tools to detect, deter and discourage offshore tax abuses. The provisions include 30 percent withholding on U.S. source payments to foreign financial institutions, foreign trusts, and foreign corporations that do not agree to disclose their U.S. account holders and owners to the IRS; requiring taxpayers to disclose their foreign accounts on their U.S. tax returns; increasing the statute of limitations to six years for failure to report certain offshore transactions and income; clarifying when a foreign trust is considered to have a U.S. beneficiary; and treating substitute dividend and dividend equivalent payments to foreign persons as dividends for purposes of U.S. withholding. The provisions are estimated to raise $8.7 billion over 10 years.
New reporting and tax withholding requirements have been imposed. Most foreign investment firms and entities are covered in the bill. IRS agreements are specified for reporting, in lieu of withholding. Qualified intermediary program participants are not exempted from the requirements. The IRS is authorized to establish verification and due-diligence procedures. The bearer bond tax sanction has been extended to foreign markets. A penalty for underreporting foreign financial assets has been imposed. Rules for determining if a foreign trust has U.S. beneficiaries have been codified. Dividend-equivalent payments are subjected to withholding.
Securities industry representatives have voiced concerns that the HIRE Act will necessitate costly reporting systems that will be extremely difficult to implement, Hamilton said. In addition, reporting systems may run afoul of foreign data-protection and privacy laws.
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