The recently enacted Hiring Incentives to Restore Employment Act (the "HIRE Act") imposes new withholding and information reporting requirements on certain cross-border payments. Of note, the HIRE Act:
- Creates new U.S. Internal Revenue Code Section 1471, which
imposes a 30 percent withholding requirement on certain payments to
a non-U.S. financial institution that does not enter into an
agreement with the Secretary of the U.S. Treasury to provide
information regarding any U.S. account holder of the institution
and to withhold on certain pass-through payments the financial
institution makes. This provision applies to payments made
beginning in 2013. Payments beneficially owned by non-U.S.
governments are exempt from this provision.
- Creates new Code Section 1472, which imposes a 30 percent
withholding requirement on certain payments to a non-U.S. entity
that is not a financial institution if the entity or the beneficial
owner of the payment does not provide certain certifications
regarding any U.S. beneficial owners of the payment. This provision
applies to payments beginning in 2013. Payments beneficially owned
by non-U.S. governments are exempt from this provision.
- Provides that the exemption from withholding applicable to
portfolio interest shall only apply to obligations issued in
registered form (a previous provision extended the exemption to
certain bearer bonds that were designed to be issued only to
non-U.S. persons).
- Adds new reporting requirements for U.S. individuals who own
interests in certain non-U.S. financial assets (including any
interests in a non-U.S. entity that is not held through a U.S.
financial institution) that exceed $50,000 in value.
- Adds a new reporting requirement for U.S. shareholders of a
passive foreign investment company ("PFIC"), as detailed
by the U.S. Internal Revenue Service (the
"Service").
- Treats "dividend equivalent" payments as being
payments from U.S. sources subject to 30 percent withholding (or a
lower applicable treaty rate). Dividend equivalent payments include
payments made in connection with securities lending transactions
that reference U.S. issuers and notional principal contracts
payments determined by reference to U.S. issuers.
Most significantly, new Sections 1471 and 1472 will impose significant reporting requirements on non-U.S. financial institutions and other non-U.S. entities receiving payments from U.S. sources who want to avoid being subject to the 30% withholding tax. Payments for this purpose are defined to include virtually all items of income from U.S. sources as well as gain realized with respect to dividend paying shares or interest bearing instruments.
While these Sections do not impose an underlying substantive tax liability, and therefore the recipient of the payment could ultimately file a claim for a refund of the withheld amounts, the Act provides that a foreign financial institution will not be entitled to file a claim for a refund if it is the beneficial owner of the payment, unless it is entitled to a reduce withholding rate under a Treaty. If the foreign financial institution is entitled to a reduce rate under a Treaty, a refund of any withheld amounts will be made without any interest component. Thus, foreign financial institutions receiving payments from U.S. sources will effectively have no choice but to comply with these new reporting requirements beginning in 2013. The precise form and scope of the reporting requirement and the certification that will need to be provided to U.S. payors to avoid the withholding requirement will need to be developed by the Service in regulations.
Foreign financial institutions involved in securities lending transactions or notional principal contracts involving U.S. issues will also need to immediately assess their withholding obligations with respect to dividend equivalent payments made as part of these transactions. The requirement to withhold on these payments begins 180 days after March 18, the date the Act was enacted. It is not entirely clear how these payments should be viewed under any applicable U.S. Tax Treaties, as the HIRE Act does not state that the payments should be treated as dividends for Treaty purposes or even for all purposes under the Code.
With respect to the potential for multiple withholdings being made on the same income stream, since both the actual dividend and the dividend equivalent payment will be treated as U.S. source payments potentially subject to withholding, the HIRE Acts state that the Service "may" reduce any overwithholding.
The Act may affect the marketability of shares in a public or private PFIC depending on the scope of the reporting requirements ultimately adopted by the Service.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
