Chile Forum

By Martin Vaughan

Of DOW JONES NEWSWIRES


WASHINGTON (Dow Jones)--Banking groups are asking House lawmakers to ease the reporting burden they say they would face under new legislation aimed at catching tax evaders.

The bill from House Ways and Means Committee Chairman Charles Rangel (D., N.Y.) and Rep. Richard Neal (D., Mass), would require foreign banks to report the identities and account balances of their U.S. customers to the Internal Revenue Service, or pay a 30% tax withholding penalty on any payments to the bank originating in the U.S.

Banking trade groups said the bill in its current form is unworkable, and could cause numerous foreign banks to pull out of U.S. investments.

"One might reasonably conclude that the goals of the bill are unattainable absent a multilateral agreement regarding uniform, universal identification and reporting standards," wrote the European Banking Federation and the Institute of International Bankers in a letter to lawmakers.

The new reporting requirements would require the largest foreign banks to verify that tens of millions of accounts are not U.S.-owned, the groups said.

They sought a change to the bill that would allow banks to rely on data it already has, such as an address or residency information, to establish that the account-holder is not a U.S. person. The bill in its current form would allow banks to rely on a certification from the account-holder that the account is not U.S.-owned.

The foreign banking groups also asked lawmakers to drop a requirement that account activity such as receipts and withdrawals be included in annual reporting to the IRS on U.S.-owned accounts.

The Rangel-Neal bill is also backed by influential Senate Democrats and the administration of President Barack Obama. It is expected to be included in a year-end House bill to extend expiring tax breaks for businesses and individuals.

Congressional tax estimators say the bill would raise $8.5 billion over 10 years by making it harder for U.S. taxpayers to shelter money in offshore accounts.

Besides banks, foreign investment entities like hedge funds, private equity and mutual funds would face new reporting requirements on their U.S. investors.

The Securities Industry and Financial Markets Association, another trade group, argued in a separate letter to House lawmakers that certain foreign partnerships should be carved out of the reporting mandates. Private equity and hedge funds are already required to report to the IRS in some cases regarding their U.S. partners on a Schedule K-1 form.

SIFMA also asked lawmakers to add a de minimis threshold for reporting of $50,000 per account.

In a separate submission, the Financial Services Roundtable urged lawmakers to narrow the kinds of payments to which the 30% withholding penalty would apply. Under the bill, withholding tax would apply to U.S. payments to account-holders of a non-compliant bank, and also to payments to the bank's own account.

"This penalty will force those foreign financial institutions that simply cannot comply with the new reporting obligations to divest all their U.S. investments," the group wrote.

Lawmakers should remove a provision that would effectively end U.S. tax benefits for foreign-issued bearer bonds, said the Organization for International Investment. "The repeal of U.S. tax benefits for issuers and holders of these bonds could be a major impediment to the ability of U.S. corporations to float debt in the Eurobond market," OFII wrote.

Several groups also urged lawmakers to push out the bill's effective date of Dec. 31, 2010, saying multiple years would be needed to prepare to comply with the new reporting regime.

But there is a broader trend going on, particularly by Western European governments and through the efforts of the Organisation for Economic Cooperation and Development, to shine a light on tax havens and stop tax avoidance.

On October 27, 2009, Senator Max Baucus (D-MT), Chairman of the Senate Finance Committee, and Congressman Charles Rangel (D-NY), Chairman of the House Ways and Means Committee, introduced bill H.R. 3933 titled the Foreign Account Tax Compliance Act of 2009 (the “Bill”).

If enacted in its current form, the Bill would:
Require a 30% withholding on all "withholdable payments" (generally, U.S. source dividends, interest or other “fixed and determinable income”, as well as gross proceeds from the sale of assets that can produce U.S. source dividends or interest) to a "foreign financial institution", unless such foreign financial institution enters into an agreement with the IRS under which it agrees to comply with certain verification and reporting procedures with respect to "United States accounts." For purposes of this provision, a “foreign financial institution” would include not only a bank or securities firm , but also a “foreign investment vehicle” such as a hedge fund or private equity fund.

A “United States account” would include any financial account held directly by (i) one or more United States persons (other than publicly traded corporations, certain tax-exempt organizations, a government, government agency or instrumentality, a bank, a real estate investment trust and certain trusts) or (ii) foreign entities that have one or more "substantial United States owners." A “substantial United States owner” means (i) with respect to a corporation, any United States person which owns directly or indirectly more than 10% of the stock of such corporation (by vote or value) and (ii) with respect to a partnership, any United States person which owns directly or indirectly more than 10% of the profits or capital interests in such partnership, and (iii) with respect to an investment vehicle, a U.S. person which owns any portion of such entity.

The agreement that a foreign financial institution would have to enter into with the IRS would require the institution, among other things, to comply with verification and due diligence procedures with respect to identifying United States accounts; annually report certain information with respect to any United States account, including the account balance or value, and the gross receipts and gross withdrawals or payments from the account; comply with requests by the IRS for additional information with respect to any United States. account; and attempt to obtain a waiver in any case in which any foreign law would prevent the reporting of the information required under the provision, and if the waiver is not obtained, to close the account. Alternatively, the foreign financial institution could elect to be subject to the same reporting requirements as a U.S. financial institution. The proposed provision would apply in addition to any requirement imposed under a Qualified Intermediary or similar agreement.

Repeal the exemption for interest non-deductibility and treatment as portfolio interest for foreign-targeted obligations. Under current law, a taxpayer may not deduct interest paid on obligations in bearer form. Furthermore, interest on obligations in bearer form does not qualify for the portfolio interest exemption. However, an exception to these general rules is provided for obligations that are issued under arrangements reasonably designed to ensure their sale to non-U.S. persons. The Bill would eliminate the foreign-targeted obligation exception for obligations issued more than 180 days after the Bill is enacted.

Amend the U.S. tax rules applicable to foreign trusts to: (1) broaden the scope of existing rules that treat a U.S. person who transfers property to a foreign trust that has U.S. beneficiaries, as an owner of the foreign trust by (a) expanding the circumstances in which a foreign trust is treated as having a U.S. beneficiary and (b) creating a presumption that a foreign trust to which a U.S. person transfers property has U.S. beneficiaries, unless information proving otherwise is provided to the IRS; (2) treat as a trust distribution, the permitted use of trust property (e.g., a house, apartment, yacht) by a U.S. grantor, U.S. beneficiary, or U.S. person related to such grantor or beneficiary, unless the trust receives the fair market value of the use of the property within a reasonable amount of time; and (3) permit the U.S. Treasury Department to impose additional reporting requirements on a U.S. person who is treated as an owner of a foreign trust; and (4) change the penalties for the failure to file certain information returns related to foreign trusts.

Introduce a new (30%) U.S. withholding tax on "dividend equivalent payments”, i.e. payments made under swaps or other derivative contracts that are contingent on, or determined by reference to, the payment of U.S. source dividends. A limited exception is provided for payments with respect to contracts the IRS determines does not have the potential for tax avoidance.

Introduce FBAR-type obligations requiring individuals who hold an interest in "specified foreign financial assets" to report such interest with their income tax return if the aggregate value of the assets exceeds $50,000. A "specified foreign financial asset" would include (i) any financial account (such as depositary and custodial accounts) maintained by a foreign financial institution, and (ii) if not held by a financial institution, (a) foreign stocks or securities, (b) any financial instrument or contract held for investment that has a foreign issuer or counterparty, and (c) any interest in a foreign entity.

Introduce reporting requirements for "material advisors" who assist a U.S. person in a "foreign entity transaction." The Bill would define a “material advisor” as any person who provides material aid, assistance or advice concerning a foreign entity transaction and who earns gross income in excess of $100,000 in a calendar year for its services. A “foreign entity transaction” would be defined as the direct or indirect acquisition of any interest in a foreign entity (including any interest acquired in connection with the formation of such entity) if any citizen or resident of the United States is required to file a report in connection with the acquisition under certain specified Internal Revenue Code sections.

Provide penalties for the violation of the obligations imposed by the Bill.