On October 27, 2009, Senator Max Baucus (D-MT) and Representative Charles Rangel (D-NY) introduced the Foreign Account Tax Compliance Act of 2009 (H.R. 3933, S. 1934) (the “Bill”) in the U.S. Congress. The Bill is a new version of legislation that incorporates some, but not all, past proposals contained in President Obama’s 2010 budget proposals, the Stop Tax Haven Abuse Act introduced by Senator Carl Levin (D-MI) and Representative Lloyd Doggett (D-TX), and draft legislation released by Senator Baucus that targets individuals and corporations that shelter income and assets overseas. According to a statement released by the House Ways and Means Committee, the Bill “is intended to clamp down on tax evasion and improve taxpayer compliance by giving the IRS new administrative tools to detect, deter and discourage offshore tax abuses.”
Conspicuously absent from the Bill are provisions dealing with reporting of offshore asset transfers, Foreign Bank and Financial Accounts Report (FBAR) matters, a blacklist of offshore secrecy jurisdictions, treatment of foreign companies as domestic companies if they are managed from the United States, and the codification of the economic substance doctrine (which appears, however, in pending health care bills).
Disclosure Key Focus of Bill
The Bill would impose withholding tax on payments made to foreign financial institutions and other foreign entities that do not disclose holdings by U.S. persons (or foreign entities owned by certain U.S. persons), and would create several new information-reporting requirements. A key feature of the legislation is the requirement that foreign financial institutions report information about U.S. account holders, or face a 30 percent withholding tax on U.S. source fixed and determinable, annual or periodical (FDAP) income and gross proceeds from sales of assets that would generate U.S. source income. Stephen Shay, Treasury deputy assistant secretary for international tax affairs, characterized the bill’s approach as an “alternative to a blacklist approach”: rather than focusing on specific countries in terms of tax haven activity, the bill focuses directly on foreign financial institutions and other foreign entities, offering them incentives and possible penalties depending on their individual actions regarding tax evasion.
The Bill would
- require foreign financial institutions (including Qualified Intermediaries) to enter into an agreement with the IRS pursuant to which they would be required to provide the identity of U.S. individuals or foreign entities with “substantial U.S. owners” (i.e., U.S. persons owning directly or indirectly more than 10 percent of the foreign entity) that maintain financial accounts, provide relevant account information, comply with verification and due diligence procedures, and report annually certain information to the Treasury or face a 30 percent withholding tax on withholdable payments;
- define withholdable payments to include not only FDAP income from U.S. sources, but also gross proceeds of sales of any income-producing assets from U.S. sources;
- permit withholding agents to rely on certification provided by an account holder so long as there is no reason to know (rather than having no actual knowledge) that the information is incorrect;
- require non-financial institutions to provide withholding agents with the name, address and tax identification number of any U.S. individual with more than 10 percent ownership in the firm or face a 30 percent withholding tax;
- eliminate the favorable tax treatment for bearer-bonds marketed to offshore investors, and stop the issuance of bearer bonds by the U.S. government;
- impose penalties as high as $50,000 on U.S. taxpayers who own at least $50,000 in offshore accounts or assets but fail to report the assets on their annual income tax return;
- levy a 40 percent penalty rather than the usual 20 percent on the amount of any understatement attributed to undisclosed foreign assets;
- extend from three years to six years the statute of limitations for “substantial” omissions of income exceeding $5,000 attributable to offshore assets;
- require “material advisers” to disclose the identities of any clients they assist in buying offshore assets, as well as the assets purchased;
- require shareholders in passive foreign investment companies to file annual returns;
- make it easier for the Treasury to presume that foreign trusts have U.S. beneficiaries, and establish a $10,000 minimum failure-to-file penalty for certain foreign-trust-related information returns; and
- subject dividend equivalent payments included in notional principal and similar types of contracts that are paid to overseas corporations to the same 30 percent withholding tax levied on dividends paid to foreign investors. Treasury Secretary Timothy Geithner endorsed the measure, saying in a release that it “fits well into the Administration’s dual-track strategy of improving our domestic tax laws while increasing global cooperation on tax information exchange.” But some lawmakers suggested that the Bill, as written, would not go far enough in curbing abusive offshore transactions.