On March 18, President Obama signed into law the Hiring Incentives to Restore Employment (HIRE) Act, and, in the process, provided the Treasury Department with powerful new tools to locate, and prosecute, U.S. persons hiding assets overseas from the Internal Revenue Service. Specifically, the new law creates an extensive reporting and taxing regime for foreign financial institutions possessed of U.S. accountholders. Title V, the Foreign Account Tax Compliance Act, adds to the Code a new Chapter 4.
Among other things, the Act imposes a 30% withholding tax on many types of U.S. source income derived by, and gross sales proceeds of, foreign financial institutions. The phrase, "Foreign Financial Institutions" is defined broadly, thus bringing within the Act's purview a broad range of entities, including investment vehicles of almost every stripe. To avoid this withholding requirement, these entities are provided the option of entering into information reporting agreements with the Service, in which they agree annually to disclose certain information regarding their U.S. accountholders, grantors, and owners.
The Act imposes a separate, 30% withholding tax on payments made from the United States to certain non-financial foreign entities. Any non-U.S. person holding U.S. investments through a foreign entity will be subjected to the new withholding tax. Again, those affected can avoid the tax by disclosing to the IRS certain information, namely, whether the foreign entity is possessed of "substantial" U.S. owners, defined as those holding at least a 10% interest. Notably, the burden of making this disclosure rests upon U.S. "withholding agents."
The Act also creates additional reporting requirements for U.S. citizens and permanent residents holding certain offshore accounts. It is already incumbent upon persons holding such accounts that exceed $10,000 in aggregate value to make two disclosures each year. However, the new law will require those holding offshore assets with an aggregate value greater than $50,000 to make certain additional disclosures. Specifically, holders of such interests must report any ownership of non-U.S. securities, any financial instrument or contract held for investment from a foreign issuer, and any interest of more than 10% in any foreign entity.
The Act also extends to six years the statute of limitations for significant omissions of income in connection with foreign financial assets, creates new disclosure requirements for those who advise others on the formation of certain foreign entities, and requires holders of foreign mutual funds annually to file a Form 8621, regardless of whether the investment has generated any gain or income.
Finally, the new law makes significant changes to the Code's provisions regarding foreign trusts, expanding the definition of "U.S. beneficiary" to include any U.S. person who may receive an interest in the trust contingent on a future event, or in which the trustee has discretion to make a distribution to that person.
Predictably, critics of the new measures argue that the law will wreak general havoc, while restricting American access to offshore investments. However, given the rampant use of foreign financial institutions, trusts, and corporations by U.S. individuals to evade U.S. tax, the new measures represent an important first step in attaining the ever elusive tax justice.