On March 18, 2010, President Obama signed the Hiring Incentives to Restore Employment Act into law (Public Law 111-147) (the "Act"). The provisions of the Act that address foreign account tax compliance are intended to improve taxpayer compliance by giving the Internal Revenue Service (the "IRS") new administrative tools to detect, deter, and discourage offshore tax abuses. In doing so, the Act imposes broad disclosure and reporting requirements on foreign financial institutions and other foreign entities including private equity funds, hedge funds, and certain investment vehicles (including foreign issuers of collateralized debt obligations or collateralized loan obligations), as well as entities engaged in banking or similar businesses. The international tax reform provisions in the Act are limited to provisions regarding withholding and information reporting. The language in the Act is based on proposals included in President Obama's 2010 Budget and legislation introduced in October 2009 as the Foreign Account Tax Compliance Act of 2009 ("FATCA") by Senate Finance Committee Chair Max Baucus (S. 1934) and then-House Ways and Means Committee Chair Charles Rangel (H.R. 3933). The Act excludes FATCA language contained in H.R. 3933 that would have required tax or investment advisers to disclose the identities of any clients they assist in buying offshore assets, as well as the assets purchased.
This client alert summarizes certain significant provisions of the Act that address foreign account tax compliance. Other provisions of the Act that address foreign account tax compliance (but that are not discussed here) deal with uncompensated use of trust property and reporting requirements of U.S. owners of foreign trusts. The Act also includes a number of provisions aimed at increasing hiring, such as (a) payroll tax forgiveness; (b) an employee retention credit, and (c) an increase in the limitation for initial-year expensing of certain depreciable business assets provided under Section 179 of the Internal Revenue Code of 1986 (the "Code").
The changes to withholding and reporting requirements described in this client alert represent fundamental changes. Generally, the broad withholding rules become effective on January 1, 2013. Pending the release of Treasury Regulations on this subject, persons who would be affected by the new withholding and reporting requirements should consider how they will comply with the new provisions well before they become effective. Likewise, the changes described in this client alert regarding notional principal contracts and securities lending transactions that are encompassed in the provision concerning dividend equivalent and substitute dividend payments are a reversal of prior law and, in the absence of prompt Treasury Regulations or clarifying legislative history, are likely to create compliance and operational issues for parties that are obligated to withhold. Parties to equity based notional principal contracts should evaluate whether existing notional principal contracts should be terminated and replaced with
Act-compliant transactions prior to September 14, 2010, when they become effective.
SUMMARY OF THE ACT
The foreign account tax compliance provisions in the Act: