- On 18 March 2010, the President of the United States of America, Barack Obama, signed into law the "Hiring Incentives to Restore Employment Act". A number of incentives are contained within the Act for boosting employment, such as payroll tax relief and business credits for "hiring and retaining unemployed workers".
- The funding for such incentives is intended to come from the "Foreign Account Tax Compliance" provisions that are set out within Title V of the Act titled "Offset Provisions".
- In a nutshell, the Offset Provisions introduce reporting requirements for foreign financial institutions in relation to United States account holders or to be subject to a 30 per cent withholding tax on various forms of transactions. Similar provisions apply to individuals. The Offset Provisions are set out under five separate parts.
PART I – INCREASED DISCLOSURE OF BENEFICIAL OWNERS
- Section 501 "Reporting on certain foreign accounts" has amended The Internal Revenue Code of 1986 by inserting "Chapter 4 – Taxes to Enforce Reporting on Certain Foreign Accounts" involving four new sections: 1471, 1472, 1473 and 1474.
- Section 1471 introduces various reporting requirements on payments to foreign financial institutions or be subject to a 30 per cent withholding tax. Section 1471©(1) requires the foreign financial institution to report on each United States account maintained by it – the name, address and TIN of each account holder, the account number, the account balance or value, and the gross receipts and gross withdrawals or payment from the account. There is an exception for certain accounts held by individuals where the aggregate value of all depository accounts held in whole or in part and maintained by the same institution does not exceed US$50,000.
- Section 1472 introduces similar reporting requirements on payments to foreign entities or be subject to a 30 per cent withholding tax.
- Section 1473 sets out the various definitions. Crucially, the definition of a "Withholdable Payment" is extremely broad capturing "any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits and income, if such payment is from sources within the United States, and any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United State". A "Substantial United States Owner" is any United States person who owns more than 10 percent of the stock of a corporation, profits or capital in a partnership, or beneficial interests in a trust.
- Section 1473 (4) defines a "Withholding Agent" as persons acting in whatever capacity "having the control, receipt, custody, disposal, or payment of any withholdable payment" and Section 1473 (5) defines a "Foreign entity" as "any entity which is not a United States person".
- Section 1474 sets out the dates for implementation of the provisions with many of the amendments set to apply to payments made after 31 December 2012. There is a "grandfather clause" (that is, an exemption) for any obligation outstanding two years after the date of enactment of the Act or from the gross proceeds from any disposition of such an obligation.
- Section 502 repeals certain foreign exceptions to the registered bond requirements within the effective date two years after the date of the enactment of the Act.
PART II – UNDER REPORTING WITH RESPECT TO FOREIGN ASSETS
- Section 511 (a) inserts a new section 6038D into the Internal Revenue Code of 1986 requiring the yearly disclosure of "information with respect to foreign financial assets" of an individual if the aggregate value of all such assets exceeds US$50,000.
- Section 6038D (b) defines a "specified foreign financial asset" as any financial account maintained by a foreign financial institution as well as any of the following assets – any stock, security, financial instrument or contract issued by a person other than a United States person .
- Section 6038D © defines the required information in
relation to any asset, being -
(1) For any account – the name and address of the financial institution in which such account is maintained and the number of such account;
(2) For any stock or security – the name and address of the issuer as well as such information necessary to identify the class or issue of which they are part;
(3) For any other instrument, contract or interest -
(A) such information necessary to identify it; and
(B) the names and addresses of all issuers and counter parties;
(C) the maximum value of the asset during the taxable year.
- Section 6038D (d) states that the penalty for failure to
disclosure is -
(1) For any individual failing to disclose as required for any taxable year a penalty of US$10,000;
(2) If the failure continues for 90 days, such individual shall pay an additional penalty of US$10,000 for each 30-day period (or fraction thereof) with the penalty not to exceed US$50,000.
- Section 6038D (g) provides an exception such that no penalty shall be imposed for any failure which is shown to be due to "reasonable cause" and not to "wilful neglect". However, the fact that a foreign jurisdiction would impose a civil or criminal penalty for disclosing the required information is not reasonable cause.
- Section 512 amends section 6662 of the Internal Revenue Code increasing the penalties for underpayments attributable to undisclosed foreign financial assets from 20 per cent to 40 per cent with the effective date of such amendments applicable to the taxable years beginning after the date of the enactment of the Act.
- Section 513 amends section 6501(e) of the Internal Revenue Code of 1986 to modify the statute of limitations for the significant omission (in excess of 25 per cent) of income in connection with foreign assets or is attributable to one or more assets required to be reported and is in excess of US%5,000. The tax may be assessed or court proceedings instituted for collection of such tax within six years after the return was filed.
PART III – OTHER DISCLOSURE PROVISIONS
- Section 521 amends section 1298 of the Internal Revenue Code by requiring that each United States person who is a shareholder of a passive foreign investment company shall file an annual report to take effect as from the date of the enactment of this Act.
PART IV – PROVISIONS RELATED TO FOREIGN TRUSTS
- Section 531 makes a number of clarifications with respect to foreign trusts that are treated as having a United States beneficiary including that "an amount shall be treated as accumulated for the benefit of a United States person even if the United States person's interest in the trust is contingent on a future event" and the amendments shall apply to transfers of property after the enactment of the Act.
- Section 533 has amended section 643(i) of the Internal Revenue Code to include that if a foreign trust permits the use of any trust property, the fair market value of the use of such property shall be treated as a distribution by the trust to a grantor or beneficiary. An exemption is provided such that the subsection shall not apply where the trust is paid the fair and market value of such use within a reasonable period of time of such use. The amendments shall apply to loans made, and uses of property, after the date of the enactment of the Act.
- Section 534 (a) has amended section 6048(b) of the Internal Revenue Code by inserting the requirement that United States owners of foreign trusts "shall submit such information as the Secretary may prescribe" and the amendment shall apply to taxable years beginning after the date of the enactment of the Act.
- Section 535 (a) of the "offset provisions" has amended section 6677 of the Internal Revenue Code by altering the minimum penalty such that it is "equal to the greater of US$10,000 or 35 percent of the gross reportable amount" and the amendments shall apply to notices and returns required to be filed after 31 December 2009.
PART V – SUBSTITUTE DIVIDENDS AND DIVIDEND EQUIVALENT PAYMENTS RECEIVED BY FOREIGN PERSONS TREATED AS DIVIDENDS
- Section 541(a) of the "offset provisions" amends section 871 of the Internal Revenue Code by requiring that "a dividend equivalent shall be treated as a dividend from sources within the United States" and shall apply to payments made on or after 180 days after the enactment of the Act.
- Section 864 of the Internal Revenue Code 1986 permits taxpayers to make a one-time election to allocate and apportion interest expense on a worldwide affiliated group basis. Section 551(a) of the "offset provisions" amends section 864(f)(5)(D) and 864(f)(6) of the Internal Revenue Code such that the elections may be made only for the first taxable year beginning after 31 December 2020 (previously it was 31 December 2017).
- Section 561 of the "offset provisions" amends the time for payment of corporate estimated taxes for corporations with assets of not less than US$1 billion.
This is only a summary only of the "offset provisions" within the "Hiring Incentives to Restore Employment Act". The full text of such provisions should be read in full and can be located here.