Foreign Account Tax Compliance Act of 2009

Article by Jonathan A. Sambur , James R. Barry , Donald C. Morris , Kenneth Klein , Rafic H. Barrage , Suzanne P. Cartwright , Russell E. Nance and Daniel R. Read

Originally published November 16, 2009

Keywords: Foreign Account Tax Compliance Act, 2009, cross-border tax avoidance provisions, withholding tax, Withholdable Payments, Treasury, IRS, Information Reporting Agreement

On October 27, 2009, Senators Baucus and Kerry, together with Representatives Rangel and Neal, introduced the Foreign Account Tax Compliance Act of 2009 (the "Act"). The bill is the product of consultation between Congress and the US Treasury Department (Treasury) and is intended to curb the abuse of offshore bank and investment accounts by US taxpayers. As Congress considers legislation that increases government spending, the Act could be paired with that legislation as a spending offset because it is projected to generate $8 billion in new revenue for the Treasury over the next ten years. This increases the possibility that the Act could be approved by Congress quickly, potentially before the current session comes to an end later this year. Additionally, if the Act is brought up for consideration, it is possible that other members of Congress will seek to amend it, including possibly Senator Levin, who is the author of the Stop Tax Haven Abuse Act, which he first introduced in February 2007 and on which then-Senator Obama joined as a cosponsor.

New Withholding Tax and Information Reporting Regime for Certain Payments to Non-US Financial Institutions

The Act would create a new reporting regime that effectively requires a non-US financial institution to provide full disclosure of a US person's account maintained at that institution. This new reporting regime would be in addition to the current withholding tax regime applicable to US source income paid to non-US persons and the qualified intermediary program (QI program) that generally governs the obligations of non-US financial institutions under the current US withholding tax regime applicable to US source income paid to non-US and US persons.

To the extent that a non-US financial institution does not enter into an agreement with the Treasury or the Internal Revenue Service (IRS) to provide information regarding US persons, a withholding tax will be imposed at a 30 percent rate on all payments to the non-US financial institution of US source income and gross proceeds relating to assets that produce US source income (not merely those payments attributable to US persons or US beneficial owners). Dual withholding would not be required under either the provisions of this bill or the current withholding rules applicable to US source payments. Non-US persons that would otherwise be permitted to obtain tax treaty benefits with respect to a payment of US source income, however, would not be entitled to treaty benefits in respect of this new withholding tax.

INFORMATION EXCHANGE BY NON-US FINANCIAL INSTITUTIONS WOULD ELIMINATE WITHHOLDING TAX

As a preliminary matter, the Act would create a new chapter of the Internal Revenue Code that provides for the imposition of a 30 percent withholding tax either on any payment to a non-US financial institution of US source income or with respect to gross proceeds from the sale of property that produces US source dividends or interest (Withholdable Payments). Accordingly, this withholding tax would apply to all Withholdable Payments made to the non-US financial institution (including those on assets held for the institution's own account), not merely those Withholdable Payments attributable to a US person. This withholding tax could be avoided only if the financial institution enters into an agreement with Treasury or the IRS to provide information relating to certain US persons that directly or indirectly maintain an account at such financial institution (Information Reporting Agreement).

The Information Reporting Agreement would require that the non-US financial institution (i) obtain information from each account owner to determine whether the account was a "United States account"1 (US Accounts); (ii) comply with verification and due diligence rules relating to the identification of US Accounts (these requirements will be specified by regulation, but it is expected that these rules will be based upon the know your customer (KYC) standards for identifying US persons, including indirect account holders, that are followed in the anti-money laundering (AML) context); (iii) make an annual report of information with respect to its US Accounts (these requirements also would be specified by regulation); (iv) comply with requests by the United States to provide additional information with respect to these US Accounts; and (v) obtain appropriate waivers of local privacy laws from the owner of US Accounts or, to the extent not provided, close the account. Under the Act, information must be reported regarding US Accounts maintained by financial institution affiliates (including controlled partnerships) of a non-US financial institution that has entered into an Information Reporting Agreement.

The legislation authorizes Treasury to terminate an Information Reporting Agreement, and thereby subject an institution to the 30 percent withholding tax, if a determination is made that the non-US financial institution is not in compliance with the agreement. It is unclear under what circumstances such a determination would be made (e.g., whether a technical default would result in such a determination or whether some type of gross noncompliance is required).

NON-US FINANCIAL INSTITUTIONS MAY ELECT TO UNDERTAKE INFORMATION REPORTING AS IF THEY WERE US FINANCIAL INSTITUTIONS, SUBJECT TO CERTAIN MODIFICATIONS

As an alternative to the above information reporting requirements, non-US financial institutions could elect to comply with the information reporting obligations currently imposed on US financial institutions with respect to payments to US persons (i.e., reporting payments on Form 1099). In such case, an electing non-US financial institution would report payments to US Accounts as if the recipient of the payment were a US individual and the payment were considered made in the United States. Prior to making this election, non-US financial institutions should consider the differences between the applicable information reporting rules for US and non-US financial institutions. For instance, some non-US financial...