Recently, I was a panel member for one of the webinars in EB-5 Diligence’s webinar series. It was on the topic of the Foreign Accounts Tax Compliance Act, as well as the Foreign Corrupt Practices Act, and I would like to share some of the very interesting items that were discussed during the webinar.

The obvious question would be what relevance do these two issues have in relation to EB-5 matters. The FCPA will be applicable to any party who, either directly or indirectly, is a participant or involved in the chain of command with respect to any improper activities that were undertaken to improperly influence officials in foreign countries to grant favor or benefits. This would include marketing agents, who may seek special favors from governmental officials. The SEC has stated that there is vicarious liability for any participant in the process, and this is an area that should be addressed by appropriate documentation.

It is my recommendation that all agency agreements specifically incorporate this act and provide for a representation by the agent that it will be in compliance with all local laws, as well as the Foreign Corrupt Practices Act in connection with the above referenced activity. The next topic discussed was somewhat more relevant to EB-5 involving FATCA. Basically, some of FATCA provisions include the following:

  • U.S. persons owning or having signatory authority of these foreign accounts or other specified financial assets must report them on a new IRS Form 8938, Statement of Specified Foreign Financial Assets, which is filed with the person’s U.S. tax returns if the accounts are generally worth more than US$50,000; a higher reporting threshold applies to US persons who are overseas residents and joint filers. Account holders would be subject to a 40% penalty on understatements of income in an undisclosed foreign financial asset. Understatements of greater than 25% of gross income are subject to an extended statute of limitations period of six years. It also requires taxpayers to report financial assets that are not held in a custodial account, i.e., physical stock or bond certificates. 
  • It changed a method where foreign investors had not been due U.S. dividends by converting them into “dividend equivalents” through the use of swap contracts. 
  • FATCA increased penalties and imposed certain negative presumptions on Americans whose accounts are not located in the U.S. 
  • These reporting requirements are in addition to the requirement for all U.S. persons for reporting of non-U.S. financial accounts to the U.S. Financial Crimes Enforcement Network; this most notably includes Form 114, “Report of Foreign Bank and Financial Accounts” (FBAR) for foreign financial accounts exceeding US$10,000 required under Bank Secrecy Act regulations issued by the Financial Crimes Enforcement Network (FinCEN).

As a result, it is important for foreign investors to note that, when they become U.S. residents for income tax purposes, they not only have an obligation to report worldwide income, but also an obligation to address other issues as well in connection with reporting requirements, such as a signatory power over a foreign bank account and other revenue sourcing companies that require reporting on the Form 1040 tax return.

Clearly, U.S. compliance with the income tax laws, based upon worldwide income, has become a very important concern for foreign investors.