Tax Alert: Proposed Foreign Account Tax Compliance Act of 2009 (H.R. 3933, S. 1934)
11/17/2009
On October 27, 2009 Charles Rangel, Max Baucus, Richard Neal, and John Kerry introduced the Foreign Account Tax Compliance Act of 2009. At a hearing on the proposed legislation on November 5th, Congressman Neal predicted that the bill could be enacted into law this year. The legislation is supported by President Obama, Treasury Secretary Timothy Geithner, and IRS commissioner Douglas Shulman. If enacted, the legislation is estimated to raise US$8.5 Billion over 10 years.
The proposed legislation was preceded by similar proposals included in President Obama’s fiscal year 2010 budget proposal as well as the “Stop Tax Haven Abuse Act” (the “Levin/Doggett Bill”). Senate Finance Committee Chairman Baucus indicated that the bill “represents the best ideas from both the House and the Senate on how to strengthen IRS resources to root out tax cheats once and for all.”
Certain “key” provisions of note in the bill are the following:
1. New Sections 1471 through 1474 would be added to the Internal Revenue Code to require 30% withholding tax on any “withholdable payment” (which includes US source FDAP income and also certain capital gain income) made to (a) a foreign financial institution unless the foreign financial institution agrees in writing with the IRS to take certain steps to disclose US investors, and (b) “non-financial foreign entities (e.g. hedge funds and private equity funds) unless the non-financial foreign entity provides certain disclosures with respect to its US investors (or certifies that it has none) to the IRS. If enacted, it is likely the IRS Forms W-8 forms will have to be amended or replaced to allow for the additional certifications related to US persons.
2. Section 163(f)(2)(B) of the Code would be repealed which would eliminate the portfolio debt exception as it applies to foreign targeted bearer bonds. This provision would not repeal the portfolio debt exception as it applies to “registered debt obligations” (the majority of portfolio debt falls into this latter category) but clearly issuers and holders of portfolio debt obligations would be well advised to review the basis for qualification.
3. New Section 6038D would be added to the Code to require any US individual who holds an interest in a “specified foreign financial asset” to report certain information about such asset on the individual’s tax return if the aggregate value of such assets is in excess of US$50,000. This would also apply to entities formed or used to hold specified foreign financial assets (“SFFAs”). SFFAs include financial accounts maintained by a foreign financial institution and any stock or security issued by a non-US person, any financial instrument or contract held for investment that has a non-US issuer or counterparty, or any interest in a foreign entity.
4. Failure to disclose the required information regarding SFFAs would result in a $10,000 penalty. Section 6662 would be amended to impose a 40% penalty for any underpayment attributable to any undisclosed SFFA and Section 6501(e) would be amended to allow for a 6-year statute of limitations for any understatement attributable to any undisclosed SFFA.
5. New Section 6116 would be added to the Code to require any “material advisor” to any “foreign entity transaction” to file a return with the IRS in relation to the transaction” or be subject to a penalty equal to the greater of US$10,000 or 50% of the gross income derived by the material advisor with respect to the foreign entity transaction.
6. All shareholders in passive foreign investment companies would be required to file an annual report with respect to such investment.
7. The legislation would amend Section 679(c)(1) of the Code to provide that an amount would be treated as accumulated for the benefit of a US person even if the US person’s interest in a foreign trust is contingent on a future event. The legislation would also create presumptions that any foreign trust has US beneficiaries if any US person makes a transfer to a foreign trust and makes the minimum penalty for failure to provide disclosures with respect to foreign trusts US$10,000.
8. New Section 871(l) would be added to the Code to treat certain "dividend equivalent” payments as being subject to a 30% withholding tax, absent a reduction in rate pursuant to an applicable US tax treaty. This provision would apply to certain “swap payments” that are contingent upon, or determined by reference to, the payment of a dividend.
Each of the foregoing provisions have different effective dates, so careful attention will need to be paid to the relevant effective dates as this legislation moves forward.
For more information about this matter and how it may affect you or your business if enacted, please contact a member of the J.H. Cohn International Tax Services Group: James Wall (jwall@jhcohn.com or 646-254-7460); Jan Carnevale (fjcarnevale@jhcohn.com or 973-364-6692); Howard Berger (haberger@jhcohn.com or 646-254-7457); or Michael Ozen (mozen@jhcohn.com or 310-966-2303).
Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing or recommending to another party any tax related matters.