1. Foreign Financial Institution Disclosures [§1471]
1.1 Foreign institutions will be required to enter into an agreement with the U.S. to disclose the identify of any U.S. person, or foreign entities with substantial U.S. owners, with an account at the institution or its affiliates.
1.1.1 An exception exists for accounts of individuals under $50,000.
1.1.2 Accounts include depository accounts, custodial accounts, and equity or debt interests in the financial institution.
1.1.3 Substantial ownership generally means more than 10% ownership.
1.2 The foreign institution will have to annually report on the account balance and inflows and outflows to the account.
1.3 If they don't agree to make such disclosures, the foreign institution will be subject to a 30% withholding tax on U.S. source withholdable income.
1.3.1 Such income includes interest (including any original issue discount), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income. [§1473]
1.3.2 It also includes the proceeds from the sale or disposition of any property which can produce interest or dividends from sources within the United States.
1.3.3 Does not apply to effectively connected income or most foreign source income.
1.4 COMMENT: Foreign institutions which are prohibited by local law from disclosing customer information will essentially be forced to cease making investments into the U.S. that generate this type of income, or else be faced with a 30% tax that might otherwise not apply.
2. Foreign Nonfinancial Entity Disclosures [§1472]
2.1 Nonfinancial foreign entities are required to disclose to withholding agents, the name, address and tax identification number of their U.S. substantial owners, or advise that there no such owners. The withholding agent will then report this to the IRS.
2.1.1 There are exemptions for publicly-held and certain other foreign corporations.
2.1.2 Substantial ownership generally means more than 10% ownership.
2.2 If a withholding agent does not get this information, they are obligated to impose a 30% withholding tax.
2.2.1 Such income subject to withholding includes interest (including any original issue discount), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income. [§1473]
2.2.2 It also includes the proceeds from the sale or disposition of any property which can produce interest or dividends from sources within the United States.
2.2.3 Does not apply to effectively connected income or most foreign source income.
2.3 COMMENTS
2.3.1 U.S. payors of FDAP income to foreign entities, and U.S. buyers of assets from foreign entity sellers that can produce U.S. source dividends or interest (e.g., shares of stock in U.S. corporations and debt obligations issued by U.S. persons), will need to obtain the requisite documentation from the payee, or be subject to the 30% withholding obligation. This is a big trap for unwary U.S. persons who may have to fund such payments out of their own pockets if they pay over such proceeds to foreign entities without knowledge of their withholding obligation.
2.3.2 The withholding tax, when applicable, would appear to override all U.S. tax incentives to the contrary, including treaty reductions and the portfolio interest exemption.
3. Foreign Asset Disclosures by Individuals; Statute of Limitations Extensions; Underpayment Penalties [§6038D]
3.1 The disclosure of foreign accounts and other financial assets by U.S. persons is made part of the Internal Revenue Code. These disclosures are in addition to other similar, but not identical, FBAR disclosure requirements previously enacted outside of the Code.
3.2 A new 40% understatement penalty is imposed for tax understatements that are attributable to an undisclosed foreign financial asset. [§§6662(b)(7) and (j)]
3.3 The 3 year statute of limitations for tax underpayments is extended to 6 years for omissions of items from a tax return over $5,000 which are attributable to reportable foreign assets. [§§6501(e), 6229(c)(2)]
3.3.1 COMMENT: Thus, U.S. taxpayers investing abroad incur a doubled statute of limitations simply by choosing to invest abroad instead of in the U.S., and further have an unlimited statute of limitations as to items they do not properly report.
3.4 The 3 year statute of limitations will not begin to run as to PFICs for which annual information reporting is not made, or for items relating to foreign accounts and and financial assets that are not disclosed, until the proper disclosure returns are filed. [§6501(c)(8)]
3.5 COMMENT: U.S. persons will have to comply with both the FBAR filing requirements and rules, and these new rules, even though they are reporting almost the same thing.
4. Bearer Bond Sanctions
4.1 The U.S. government is prevented from issuing bearer bonds, and the new law now imposes U.S. investor tax sanctions on bonds marketed to foreign investors. [§§149(a), 163(f)(2)(A), 4701(b)(1)]
5. New PFIC Requirements
5.1 All U.S. shareholders of a PFIC will need to file an annual information return with the IRS. [§1298(f)]
6. Determination of Foreign Trusts with U.S. Beneficiaries
6.1 U.S. reporting and taxes often relate to whether a foreign trust has a U.S. person as a beneficiary.
6.2 Treasury Regulations that find a U.S. beneficiary if there is any that has a current, future or contingent beneficial interest are now codified into law.
6.3 Foreign trusts will be treated as having a U.S. beneficiary if any person has discretion to determine the beneficiaries unless the terms of the trust specially identify the class of beneficiaries and none of those are U.S. persons. [§679(c)(4)]
6.4 Foreign trusts will be treated as having a U.S. beneficiary if any oral or other agreement could result in a U.S. beneficiary.
6.5 For purposes of the taxation and reporting of transfers to a foreign trust with a U.S. beneficiary, the IRS may presume the trust to have such a beneficiary unless required information reporting for the transfer is undertaken, and the transferor can demonstrate that under the trust (a) no part of the trust may be paid or accumulated during the year for the benefit of a U.S. person and (b) if the trust were terminated during the year, no part could be paid to a U.S. person.
7. Use of Foreign Trust Property
7.1 This will now be treated as a payment from the trust to the extent of the fair market value of such use, unless the trust is paid the fair market value of the use of the property within a "reasonable period of time" of the use. Similar rules already exist as to loans of cash or marketable securities to U.S. beneficiaries or related persons. [§643(i)]
8. Enhanced Reporting for Foreign Grantor Trusts
8.1 A U.S. person who is treated as the owner of any portion of a foreign trust under the grantor trust rules must now submit such information about the trust that the IRS may require. Presumably, some sort of annual reporting requirement will be imposed by the IRS in this regard. [§6048(b)(1)]
9. Increase in Minimum Penalty for Failure to Report on Foreign Trusts
9.1 Failures to report on certain foreign trust transactions have been subject to a 35% penalty as to the amount required to be disclosed. A minimum $10,000 penalty is now imposed.
10. Dividend Equivalents [§871(l)]
10.1 Substitute dividend payments from U.S. corporations to foreign persons are treated now as actual dividend payments.
10.2 A substitute dividend payment is:
10.2.1 any substitute dividend made pursuant to a securities lending or a sale-repurchase transaction that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources within the U.S.
10.2.2 any payment made pursuant to a specified notional principal contract (defined below) that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources within the U.S.
10.2.3 any other payment that IRS determines is substantially similar to the payments described in (A) and (B), (Code Sec. 871(l)(2)(C) ) such as certain forward contracts or other financial contracts that reference stock of U.S. corporations.
11. Portfolio Interest Exception
11.1 The portfolio interest exception from U.S. tax and withholding will no longer apply to nonregistered obligations.
About
Title
HIRE Act Foreign Provisions - Initial Review and Summary
Subject
A summary of the HIRE Act foreign tax provisions
Company
Gutter Chaves Josepher Rubin Forman Fleisher PA
Author
Charles (Chuck) Rubin
Version
19
Comments
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