Earlier this week, the "Foreign Account Tax Compliance Act of 2009" (the "bill") was introduced in the Senate and the House. The bill is another effort aimed at curbing tax evasion through use of foreign financial accounts and investments by United States persons, although many of the provisions apply more broadly, and if passed in its current form, the bill will have significant implications beyond offshore bank accounts and their equivalents, in particular for hedge funds and private equity funds that are formed offshore.
The bill was introduced in the Senate by Senator Baucus of Montana and Senator Kerry of Massachusetts, and in the House by Representative Rangel of New York and Representative Neal of Massachusetts. The bill is a successor in part to the "Stop Tax Haven Abuse Act" introduced earlier in the year by Senator Levin of Michigan, which we discussed in our client memorandum dated March 5, 2009, entitled " Recent Tax Proposals of Interest to Funds and Fund Managers."1
The bill's main feature is a new withholding tax that incentivizes foreign recipients of certain US source payments to comply with a variety of disclosure requirements relating to ownership by US persons. The bill also contains some companion reporting requirements for US investors with offshore accounts or financial interests and a separate withholding provision designed to tax dividend equivalent payments. A summary of the key provisions is set out below:
All US source payments of interest (including OID), dividends, and other items traditionally subject to withholding, as well as the gross proceeds from the sale of any equity or debt of US issuers (collectively, "withholdable payments") which are made to a "foreign financial institution" would be subject to US withholding tax at a 30% rate, unless the foreign financial institution enters into an agreement with the IRS to obtain and report information about its US account holders/investors. There are limited exceptions to this reporting requirement, the most notable of which is that no disclosure is required with respect to US tax-exempt entities. In addition to disclosure of direct US account holders/investors, a foreign financial institution must also disclose certain indirect US account holders/investors.2 For purposes of this proposal, a foreign financial institution includes not only banks, but also any other foreign entity that is engaged primarily in the business of investing or trading in securities...