What you need to know:
The new HIRE Act contains provisions intended to target offshore tax evasion by forcing the production of information relating to foreign assets owned by US persons.
What you need to do:
Beginning in 2013, US persons who make cross-border payments of US source income such as interest, dividends and stock sale proceeds must withhold 30% unless the foreign payee agrees to provide account information to the IRS. Additionally, beginning in 2011, US persons owning foreign assets exceeding $50,000 in aggregate value must disclose information relating to such assets on their federal income tax returns.
In March, President Obama signed into law the Hiring Incentives to Restore Employment Act. The HIRE Act contains numerous, broad provisions designed to crack down on offshore tax evasion by US residents. This alert highlights some key anti-evasion provisions contained in the HIRE Act.
New withholding rules affecting cross-border income payments
Beginning in 2013, US persons must withhold tax of 30% on “withholdable payments” made to foreign financial and non-financial entities. This tax must be withheld unless the foreign financial institution receiving the payment satisfies one of several alternative reporting requirements with respect to accounts owned directly or indirectly by US persons that are maintained by the institution. One way in which a foreign financial institution can avoid withholding tax is to enter into a cooperation agreement with the IRS. Under such an agreement, the foreign financial institution would, among other things, be required to report information to the IRS concerning the ownership of US accounts maintained by the institution and to withhold tax on payments received by the institution and deposited in the US account where the US owner of the account refuses to provide information requested by the IRS.
Non-financial foreign entities receiving withholdable payments have a relatively easier time avoiding withholding tax; such entities can simply certify that no US person has a 10% or greater interest in the entity.
A “withholdable payment” generally includes payments of certain types of income such as interest, dividends, rents, royalties, salaries and wages that arise from US sources. Additionally, the payment of proceeds from the sale of stocks, bonds or other instruments that can produce interest or dividends from US sources also constitutes a “withholdable payment.”
New reporting requirement for US persons holding foreign assets
Also included in the HIRE Act is a new reporting requirement for US persons holding foreign assets exceeding $50,000 in value. This reporting requirement works in conjunction with the Report of Foreign Bank and Financial Accounts, or FBAR, filing requirement, which we have discussed in a prior client alert here. Under the new reporting requirement, a US person holding an interest in a “specified foreign financial asset” must include with his or her income tax return for the year information relating to such asset if the aggregate value of all such assets owned by the person exceed $50,000. A “specified foreign financial asset” is defined as any “financial account” maintained by a foreign financial institution (i.e., deposit accounts, custodial accounts and non-publicly traded equity or debt interests in the foreign financial institution), any stock or security issued by non-US persons, any financial instrument or contract held for investment where the issuer or counterparty is not a US person, and any interest in a foreign entity.
This new reporting requirement may be triggered even if the US person is not required to file an FBAR with respect to the foreign asset. For instance, if the US person holds less than a 50% interest in a foreign entity, the US person may not have to file an FBAR with respect to accounts owned by the foreign entity but may have to file under this new requirement if the value of such interest exceeds $50,000. If the US person’s ownership of the foreign asset triggers both an FBAR filing and a filing under this new provision, the US person must file both documents. Unlike the FBAR, the filing required under this new provision is furnished to the IRS with the individual’s tax return, whereas the FBAR is furnished to the Treasury Department. Failure to furnish information under this new provision carries a $10,000 penalty, with additional penalties if the failure to disclose continues, up to a maximum of $50,000. The new report is required for all tax years beginning after March 18, 2010. The IRS is expected to produce regulations that provide guidance on how the filing requirement may be satisfied.
The discussion above summarizes only a few key provisions in the HIRE Act. Several other provisions in the Act, mainly reporting and penalty provisions that are designed to prevent offshore tax evasion, may affect your business. As discussed in another Choate alert here, the Act also contains several tax provisions designed to stimulate employment.