HIRE Act

  • Author : Michael Donovan,
  • Author : Tom O’Donnell
  • Author : Marnin Michaels
  • Date : June 2010
ABOUT THE AUTHORS (L-R): Michael Donovan, Tom O’Donnell and Marnin Michaels TEP are Partners at Baker & McKenzie

The Hiring Incentives to Restore Employment (HIRE) Act of 2010 was signed into law by President Obama on Thursday 18 March 2010. The HIRE Act is aimed at helping businesses hire and retain new employees by providing them with tax incentives. To offset the projected revenue lost from these incentives, the Foreign Account Tax Compliance Act (FATCA) was added to the bill.

Discussed below are key provisions.

1. Withholding on payments to FFIs and NFFEs

FATCA imposes an obligation to withhold 30 per cent of ‘withholdable payments’ to foreign financial institutions (FFIs) and certain non-financial foreign entities (NFFEs).

A ‘withholdable payment’ is defined as:

  • any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, or emoluments from sources within the United States,
  • any other fixed or determinable annual or periodical gains, profits and income from sources within the United States, and
  • any gross proceeds from the sale of any property that could produce interest or dividends from sources within the United States.1

The requirement that 30 per cent of the gross proceeds from the sale of property that could produce interest or dividends may bear no relation to the gain recognised on the sale.

Exception for qualified FFIs

Withholding is not required if an FFI enters into an agreement with the IRS to be treated as a qualified FFI (QFFI) and complies with certain disclosure obligations. A QFFI is required to:

  • Obtain the necessary information from each account holder to determine which accounts are US owned accounts,
  • comply with certain verification and due diligence procedures with respect to the identification of US owned accounts,
  • report certain information annually with respect to any US owned account,
  • comply with requests by the US Treasury Secretary for additional information with respect to any US owned account,
  • withhold 30 per cent from any ‘passthru payment’2 that is made to: (i) a ‘recalcitrant’ account holder, (ii) a non-QFFI, or (iii) a QFFI that has elected to be withheld upon with respect to the portion of the payment allocable to a recalcitrant account holder or to a non-QFFI, and
  • attempt to obtain a waiver in any case in which any foreign law would (but for the waiver) prevent the reporting of the required information with respect to any US owned account maintained by the FFI. If a waiver is not obtained, the QFFI is required to close the account.
The HIRE Act is aimed at helping businesses hire and retain new employees by providing them with tax incentives

The provision will apply with respect to US-owned accounts maintained both by the QFFI and by the non-QFFI members of the same ‘expanded affiliated group.’ An expanded affiliated group is an affiliated group where as a general rule there is a common ownership of more than 50 per cent. A partnership or any other entity that is not a corporation is treated as a member of an expanded affiliated group if the entity is controlled by members of the group.

Election by a QFFI to report as if it is a US financial institution

As an alternative to reporting items 4 and 5 above, a QFFI may make an election to report as if the QFFI were a US person (i.e., elect to provide full IRS Form 1099 reporting under these sections).

Interaction of the QFFI Regime with the Qualified Intermediary Regime

QFFIs that are also Qualified Intermediaries (QIs) are required to satisfy the requirements of both the QFFI regime and the QI regime. Consequently, withholding agents will have to withhold under FATCA on withholdable payments to FFIs that are QIs that are not QFFIs.

Withholdable payments to NFFEs

An NFFE is any foreign entity that is not a financial institution. FATCA requires withholding agents to deduct and withhold a tax equal to 30 per cent of any withholdable payment made to an NFFE where the beneficial owner of the payment is an NFFE.

There is an exception from withholding for NFFEs if the NFFE provides the withholding agent with:

  • the name, address, and TIN of each substantial US owner of the NFFE, or
  • a certification that the NFFE does not have a substantial US owner.

The withholding requirement does not apply to any payment beneficially owned by a publicly traded corporation or a member of an expanded affiliated group of a publicly traded corporation (defined as above but excluding partnerships or other non-corporate entities).

Credits and refunds under the US Tax Code or US Double Tax Treaties

The NFFE can file a US tax return to claim a refund (or credit) for overpayment if applicable. In general, whether there is an overpayment of withheld tax is determined in the same manner as if the tax had been withheld under the existing withholding tax rules for nonresident aliens and foreign corporations. Under these rules:

  • If a beneficial owner of a payment is entitled under an income tax treaty to a reduced rate of withholding tax, that beneficial owner may be eligible for a credit or refund of the excess of the amount withheld.
  • If a payment is of an amount not otherwise subject to US tax (because, for instance, the payment represents gross proceeds from the sale of stock or is interest eligible for the portfolio interest exemption), the beneficial owner of the payment generally is eligible for a credit or refund of the full amount of the tax withheld.

A special rule will apply with respect to any tax withheld from a ‘specified financial institution payment.’ This payment is defined as any withholdable payment with respect to which an FFI is the beneficial owner.

The new rules apply only to withholdable payments made on 1 January 2013, or thereafter.

2. Repeal of foreign-targeted obligation exception to the registration requirement and repeal of treatment as portfolio interest

FATCA repeals the foreign targeted obligation exception to the denial of a deduction for interest on bonds not issued in registered form.

The provision will apply to debt obligations issued after 18 March 2012.

3. Dividend-equivalent payments received by foreign persons treated as dividends

FATCA treats a ‘dividend-equivalent’ as a dividend from US sources for certain purposes, including the US withholding tax rules applicable to foreign persons. A ‘dividend equivalent’ is:

  • any substitute dividend;
  • a payment made under a ‘special notional principal contract’ that directly or indirectly is contingent upon, or determined by reference to, the payment of a dividend from US sources; or
  • any other payment that the US Treasury Secretary determines is substantially similar to the payment above.

The payments that are treated as US-source dividends will be the gross amounts that are used in computing any net amounts transferred to or from the taxpayer.

The provision is effective on or after 14 September 2010.

4. New disclosure rules for FFAs

FATCA requires individual taxpayers with an interest in a ‘specified foreign financial asset’ during the taxable year to attach a disclosure statement to their income tax returns for any year in which the aggregate value of all such assets is greater than USD50,000. The information required to be included on the statement includes:

  • identifying information for each asset and its maximum value during the taxable year;
  • for an account, the name and address of the institution at which the account is maintained and the account number;
  • for a stock or security, the name and address of the issuer, and any other information necessary to identify the stock or security and terms of its issuance; and
  • for all other instruments or contracts, or interests in foreign entities, the information necessary to identify the nature of the instrument, contract or interest must be provided, along with the names and addresses of all foreign issuers and counterparties.

The provision is effective immediately.

5. New reporting and disclosure requirements for passive foreign investment companies

Under current law, a PFIC is a foreign corporation if at least 75 per cent of the foreign corporation’s income is passive income or at least 50 per cent of the foreign corporation’s assets produce or are held to produce passive income. US shareholders of PFICs are subject to special tax regimes intended to eliminate the benefits of tax deferral obtained through such corporations. FATCA requires each person who is a shareholder of a PFIC to file an annual information return.

The provision is effective as of the date of the enactment. As a practical matter it will not be effective until the IRS promulgates such regulations.

6. Penalties for underpayments attributable to undisclosed FFAs

FATCA adds a new accuracy related penalty of 40 per cent on any understatement attributable to an undisclosed foreign financial asset.

The provision is effective immeidately.

7. Modification of the statute of limitations for significant omissions of income in connection with FFAs

FATCA authorizes a new six-year limitations period for assessment of tax on understatements of income attributable to FFAs.

The provision is generally effective for returns filed after the date of enactment.

8. New rules applicable to foreign trusts treated as having a US beneficiary
Determination of whether a foreign trust has a US beneficiary

In determining whether a foreign trust has a US beneficiary, FATCA clarifies that an amount is treated as accumulated for the benefit of a US person even if the US person’s interest in the trust is contingent on a future event.

The provision is effective as of the date of enactment.

Presumption that foreign trust has United States beneficiary

A foreign trust is presumed to have a US beneficiary unless the US person that directly or indirectly transfers property to a foreign trust submits information and demonstrates to the satisfaction of the US Treasury Secretary that:

  • under the terms of the trust, no part of the income or corpus of the trust may be paid or accumulated during the taxable year to or for the benefit of a US person, and
  • if the trust were terminated during the taxable year, no part of the income or corpus of the trust could be paid to or for the benefit of a US person.

The provision applies to transfers of property after the date of enactment, i.e., transfers after 18 March 2010.

Uncompensated use of trust property treated as distribution

FATCA provides that any use of trust property by the US grantor, US beneficiary or any US person related to a US grantor or US beneficiary is treated as a distribution of fair market value of the use of the property to the US grantor or US beneficiary. The use of property is not treated as a distribution if the trust is paid the fair market value for the use of the property within a reasonable period of time. A subsequent return of property treated as a distribution is disregarded for tax purposes.

The provision applies to loans made and property used after the date of enactment, i.e., after 18 March 2010.

Reporting requirement by United States owners of foreign trusts

FATCA requires a US person that is treated as an owner of any portion of a foreign trust under the grantor trust provisions to provide information as may be required with respect to the trust, in addition to ensuring that the trust complies with its reporting obligations.

The provision is effective for taxable years beginning after the effective date.

Minimum penalty for failure to report on certain foreign trusts

The initial penalty for failing to report is the greater of USD10,000 and one of the following: (i) 5 per cent of the value of the portion of a grantor trust owned by a US person who fails to cause an annual return to be filed for the trust by the trustee, (ii) 35 per cent of the value of the property transferred to a foreign trust by the US person who then fails to report the creation of the trust or the transfer to it, or (iii) 35 per cent of the amount distributed to a distributee who fails to report distributions.

The provision applies to notices and returns required to be filed after 31 December 2009. Consequently, this provision can be retroactive in effect to the beginning of 2010.

Any item of income effectively connected with the conduct of a US trade or business that is taken into account under certain other sections of the US Internal Revenue Code will not be treated as a withholdable payment.
A passthru payment is any withholdable payment or any other payment attributable to a withholdable payment.

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