Obama Administration International Tax Proposals Update

24 February 2010

FATCA provisions included in The Hiring Incentives to Restore Employment (HIRE) Act

The Hiring Incentives to Restore Employment (HIRE) Act was introduced into the US Senate on February 11th and includes the Foreign Account Tax Compliance Act of 2009 (“FATCA”) provisions approved as part of the Tax Extenders Act of 2009.

The original FATCA was drafted in response to concerns about tax avoidance by substantial numbers of US taxpayers with “undisclosed” foreign accounts. It introduces new compliance and reporting obligations and to ensure compliance, threatens to impose a 30% withholding tax on all income and capital payments from the US unless financial institutions enter into an agreement with the IRS to report all US customers.

Issues were raised by market participants in response to the original FATCA, and certain modifications were made and included within the Tax Extenders Act.

Senate Majority Leader Harry Reid has indicated that the Senate will vote on the HIRE bill as including the Tax Extenders Act provisions soon after 22 February and we will keep you updated of its progress. For the main highlights of the HIRE Act please see our briefing further below.

HIRE Act

Reporting certain foreign accounts

The bill would impose 30% withholding on income from U.S. financial accounts or assets held by a foreign financial institution and its affiliates unless that institution enters into and complies with an agreement with Treasury to report U.S. account/asset holders and other related account information.

The agreement would require the financial institution to request waivers (from account holders) of any applicable foreign secrecy law and to close any account for which the holder refuses to provide such a waiver. Reporting would not be required however for a limited number of account holders that are public corporations, tax-exempt organizations, banks, real estate investment trusts, or regulated investment companies.

Withholding obligations would also apply to other foreign entities, such as corporations or trusts but would not be required for income connected with U.S. business and taken into account under sections 871(b)(1) or 882(a)(1).

The provision generally applies to payments made after December 31, 2012. The provision, however, does not require any amount to be deducted or withheld from any payment under any debt obligation outstanding on the date that is two years after the date of enactment.

Dividend equivalent payments

The legislation would define dividends to include substitute dividends, dividend equivalent payments made pursuant to specified notional principal contracts, and similar payments, and would require withholding.

This provision would be effective 180 days after enactment.

Bond requirements

The bill would repeal the foreign-targeted obligation exception as applied to the denial of interest deductions for bonds not issued in registered form.

The provision would apply to obligations issued from 2 years after the date of enactment.

Individual reporting

The bill would further propose provisions requiring reporting by individuals in respect of interests in foreign financial assets, PFICs and trusts.

Qualified Intermediary Reminders

QI ‘audit’ reminder

By 30 June 2010, Qualified Intermediaries (“QIs”) that entered into a QI Agreement in 2007 and have a Years 3 & 6 ‘audit’ cycle must either:

• undergo a QI ‘audit’ (in strictness, it is not an audit but an Agreed upon Procedures engagement) and have the results submitted to the IRS;
• apply for an ‘audit’ extension through their external auditors;
• submit an ‘audit’ waiver request.

Further information on extensions and waivers are detailed below.

Extensions

On application to the IRS, ‘audit’ extensions to 31 December 2010 or exceptionally later may be available. An 'audit' extension request must be submitted by your external auditor by 30 June 2010. In order to apply for an extension the IRS have stated that the external auditor must be engaged by the QI to perform the QI ‘audit’ review. Please contact us should you wish to apply for an ‘audit’ extension.

Waivers

As in previous years, ‘audit’ waivers may be available on application to the IRS for QIs with reportable amounts below $1m (reportable amounts is broadly US income but please note this includes both proprietary income and amounts reported on Form 1099 as paid to US recipients).
The waiver application form is available on the IRS website.

The $1m-$4m waiver is not available to QIs for the first ‘audit’ year of their ‘audit’ cycle under their new QI Agreement.

Therefore, QIs that have reportable amounts of over $1m will not be eligible to request an ‘audit’ waiver where for example 2010 is the first ‘audit’ year of their new QI Agreement.

It should also be noted that where a QI is a member of a group which is intending to undergo a consolidated QI ‘audit’, the individual QI is not eligible for an ‘audit’ waiver. However such a QI may be eligible to be excluded from the consolidated group ‘audit’ and instead use the modified audit report format.

We would be happy to discuss your options and requirements. If you would like further information regarding consolidated QI ‘audits’ or waivers, or QI audits in general please feel free to contact us.

Approaching deadlines
QI Reporting
The deadline for submission of Forms 1042, 1042-S & 1042-T to the IRS is 15 March 2010.

Forms should be sent to Internal Revenue Service, Ogden Service Center, P.O. Box 409101, UT84409.
If you require an extension for filing, you should use Form 7004 and Form 8809 for Forms 1042 & 1042-S respectively. If you require more time to file both forms you must file both extension requests with the IRS, again by 15 March 2010. Neither extension will apply for the payment of tax which must be made by the original due date nor does it extend the date for sending a copy of the Form 1042-S to customers.