Foreign Account Tax Compliance Act Of 2009 - Congress Sets Its Sights On Overseas Tax Evasion

Author:Mr Thomas Humphreys, Shamir Merali and Remmelt A. Reigersman
Profession:Morrison & Foerster LLP
 
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On October 27, 2009, Senator Max Baucus (D-Montana) and Representative Charles Rangel (D-New York), chairmen of the Congressional tax writing committees, introduced the Foreign Account Tax Compliance Act of 2009 (the "Bill") in the U.S. Congress. A statement released by the House Ways and Means Committee indicates that 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." If enacted in its current form, the Bill would, among other things, close down "dividend-washing" transactions (arrangements involving swaps that are perceived to impermissibly avoid a U.S. withholding tax on U.S.-source dividends), require increased reporting with respect to foreign assets held by U.S. persons, impose disclosure requirements on advisors who help set up foreign entities, and strengthen rules and penalties relating to foreign trusts. Both President Barack Obama and Treasury Secretary Timothy Geithner issued statements giving their unqualified support for the Bill.

This is the last in our series of three alerts addressing the provisions of the Bill. Please see our first client alert addressing the Bill's proposed repeal of the U.S. bearer debt exception at http://www.mofo.com/news/updates/files/16103.html and our second client alert addressing the Bill's provisions regarding a 30% withholding tax on payments to foreign financial institutions and foreign entities unless certain information reporting and certification requirements are met at http://www.mofo.com/news/updates/files/16106.html .

"Dividend Washing" Under current law, the source of any payments made pursuant to a notional principal contract (or swap) is determined by reference to the residence of the person receiving the payment. Accordingly, payments (including any amounts determined by reference to dividends) received by a foreign person that enters into a swap with respect to an underlying U.S. stock are treated as foreign source payments not subject to U.S. tax. By contract, a direct distribution to the foreign person of a dividend generally would be subject to a 30% withholding tax (unless reduced by an applicable treaty). The Bill would treat as a U.S.-source dividend, for purposes of U.S. withholding tax provisions, any amount (determined on a gross basis, i.e., without regard to any offsetting payments under the swap) paid pursuant to a swap contract and that is...

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