On January 5, 2011, Congressman Lloyd Doggett (D-TX) introduced The International Tax Competitiveness Act of 2011 (H.R. 62), in order to “reduce international tax avoidance and restore a level playing field for American businesses.” The legislation, which would treat a foreign-organized corporation that is managed and controlled in the United States as a U.S. corporation, is identical to the “managed and controlled” provision included in previous bills (the 2009 “Stop Tax Haven Abuse Act” and the “International Tax Competitiveness Act of 2010”).
H.R. 62 would change the rule for determining residency of a foreign-organized corporation for U.S. federal tax purposes. Under current law, corporate residency is determined by reference to where the corporation is organized. The bill would not change the rule for determining residency for domestic corporations.
Specifically, the bill would treat foreign corporations that are directly or indirectly managed and controlled primarily in the United States as U.S. corporations for tax purposes. The provision would apply to corporations with stock regularly traded on an established securities market or to corporations (or any predecessor) with aggregate gross assets of $50 million or more (including assets under management for investors) at any time during the current year or a past year. The bill would drastically change the U.S. policy governing the taxation of investment funds. Under current law, Code 864(b)(2) allows foreigners (other than dealers) to trade in stocks, securities or commodities in the United States either directly or through a U.S.-resident agent without being treated as engaged in a U.S. business by reason of such trading. The bill targets U.S.-managed investment entities that are treated as foreign corporations under current U.S. law by treating trading or investing in stock, securities and commodities by foreign investors as U.S. trade or business activities triggering net-based income taxation.
The bill also provides two ways to trigger the “managed and controlled” test. A corporation would be considered “managed and controlled” primarily in the United States if substantially all of the corporation’s executive officers and senior management, who exercise day-to-day responsibility for making decisions involving strategic, financial and operational policies of the corporation, are located primarily in the United States. The bill would treat certain individuals, who are not executive officers or senior management of the corporation, but who nonetheless exercise similar day-to-day responsibilities, as executive officers or senior management for purposes of the test. This would also include individuals who are officers or employees of other corporations in the same chain of corporations.
In addition, a corporation will also be treated as “managed and controlled” in the United States if its assets (direct or indirectly held) include assets primarily managed on behalf of investors, and if the investment decisions are made in the United States.
Two exceptions would apply. First, a foreign corporation that is treated as a U.S. corporation under the aggregate asset test in a prior year and doesn’t reasonably expect to meet that test in a future year may be exempt from the rule if granted a waiver by the IRS. Further, assets are excluded if held by a controlled foreign corporation member of a U.S.-affiliated group if the group has a U.S. organized parent and that U.S. parent has substantial trade or business assets used in an active U.S. business. In other words, foreign subsidiaries of active U.S. parent corporations will continue to be foreign even if they are totally managed and controlled from the United States. Additional parameters regarding when the management and control of a corporation occurs primarily in the United States would be provided in regulations.
H.R. 62 represents another attempt by legislators to seek solutions to reduce the international tax gap. Commentators have noted that the legislation seems to be an attempt to limit corporations motivated by U.S. tax considerations from claiming non-residency status, to reinforce the rules under Section 7874 to prevent domestic corporation inversions, and to revise favorable tax treatment to foreign-organized investment funds that are U.S.-managed.
IRS Proposes New Rules for Reporting Interest to Nonresident Aliens
On January 6, 2011, the IRS and Treasury Department issued proposed guidance that would require U.S. bank deposit interest paid to nonresident aliens who are residents of any foreign country to be reported to the IRS annually.
Similar regulations were proposed in 2001. However, the IRS eventually withdrew those regulations after concluding that they were overly broad in requiring annual information with respect to U.S. bank deposit interest paid to any nonresident alien.
Under the regulations that are currently in effect, reporting is required by U.S. banks only if the U.S. bank deposit interest is paid to persons who are residents of Canada. The new proposed regulations withdraw the current regulations currently in effect.
The IRS stated that its rationale for again attempting to extend the annual information reporting requirement is a growing global consensus regarding the importance of cooperative information exchange for tax purposes, as well as the need to further strengthen the U.S. exchange of information program and to ensure voluntary compliance by U.S. taxpayers attempting to avoid the U.S. information reporting system by claiming to be nonresident aliens not subject to U.S. interest reporting.
IRS Unveils Second Voluntary Disclosure Plan for Offshore Assets
On February 8, 2011, the Internal Revenue Service announced the parameters of a new Offshore Voluntary Disclosure Initiative (OVDI). It differs from the initial program offered in 2009. The essential aspects of the new program are:
- To obtain the terms of the new Offshore Voluntary Disclosure Initiative, voluntary disclosures must be made by August 31, 2011.
- Unlike the first program, all amended tax returns, FBARs, etc., will have to be filed, and all taxes, penalties and interest will be required to be paid by August 31 as well.
- Unlike the first program, the period covered by the new program is 2003-2010—i.e., eight years instead of the historical six years.
- The additional one-time penalty on the highest account/asset value during the eight-year period has been increased to 25 percent (from 20 percent under the prior program).
- The IRS has also retained a special five percent rate if certain conditions are met. In addition, a new 12.5 percent rate applies to accounts or asset values that at all times during the covered period were not in excess of $75,000.
- The new program, and all of its terms, will apply to all new persons making voluntary disclosure before August 31, as well as to all those who made voluntary disclosure after the first program ended in October of 2009.
- There is a slightly revised procedure for making voluntary disclosures, which is intended to streamline and centralize the process.
A more detailed International Tax Advisory on the new Offshore Voluntary Disclosure Initiative is forthcoming.