Foreign Account Tax Compliance - Withholding Agents
The Foreign Account Tax Compliance Act (The “Act”) expands withholding rules and additional reporting requirements for foreign financial institutions and non-financial foreign entities.
Under U.S. tax law, a withholding agent must deduct or withhold a tax equal to 30% on any withholdable payment (e.g., interest, dividends, rents, salaries, wages, premiums, annuities, compensations, and other fixed or determinable annual or periodical gains, profits and income from sources within the United States) made to a foreign financial institution or to a non-financial foreign entity (unless specific reporting requirements are met).
For each U.S. account maintained by the foreign financial institution, the institution must provide identifying information for each account holder that is a specified U.S. Person or substantial U.S. owner, the account number, the account balance, and gross receipts and withdrawals from the account.
A non-financial foreign entity that is a beneficial owner of a withholdable payment must certify that it has no substantial U.S. owners or provide identifying information for each substantial U.S. owner.
Every person required to deduct or withhold any tax to enforce reporting on certain foreign accounts is liable for the tax and is indemnified against claims and demands of anyone for the amount of the payments. (IRC §1474(a), as added by the 2010 HIRE Act.)
Tax Provisions and the Health Reconciliation Act
On March 25, 2010, Congress passed the Healthcare and Education Reconciliation Act of 2010 (H.R. 4872). Included in this tax act is the Economic Substance Doctrine (new IRC Section 7701(o)). The test for Economic Substance will be two-fold:
1. Only if the transaction changes the Taxpayer’s position in a meaningful way (apart from tax benefits).
2. Taxpayer has a substantial purpose (independent of the tax benefits) for entering into the transaction.
Under the Reconciliation Act, a failure to meet the two-prong test of the Economic Substance Act (IRC Section 7701(o)) makes the transaction subject to penalty under IRC Section 6662, imposes an increased penalty amount for nondisclosed transactions that lack Economic Substance.
Under the Act, the transactions that lack Economic Substance no longer qualify for the reasonable cause exception (IRC Section 6664) and a penalty may be imposed.
H.I.R.E. and the Foreign Account Tax Compliance Act
On Thursday, March 18, 2010 President Obama signed the Hiring Incentives to Restore Employment Act (H.R. 2847). Included in the bills’ provisions is the Foreign Account Tax Compliance Act.
This Act requires foreign entities to provide U.S. Tax Withholding Agents with the name, address and Tax Identification Number of any U.S. Individual who is an account holder or a substantial owner of a foreign entity, i.e., owns more than 10% of:
1. the foreign corporation’s stock;
2. the profits or capital interest of a foreign partnership; or
3. holds more than 10% of the beneficial interest in a foreign trust (or is the trust grantor).
U.S. Tax Withholding Agents are required to report foreign account tax compliance to the U.S. Treasury Department. Publicly held corporations are exempt from the reporting requirement.
Foreign entities, who fail to report the required information will be required to withhold tax at the rate of 30% on payments made to U.S. Taxpayers.
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