President Obama signed the Hiring Incentives to Restore Employment (“HIRE”) Act into law on March 18, 2010. The HIRE Act includes provisions of the Foreign Account Tax Compliance Act (“FATCA”), which adds a new withholding regime to the U.S. Internal Revenue Code. This new regime uses withholding taxes to enforce detailed reporting and disclosure requirements for certain foreign entities that receive U.S. source income. A withholding agent must deduct and withhold a tax equal to 30% of any withholdable payment made to these foreign entities to the extent they fail to satisfy certain reporting and disclosure requirements with respect to their U.S. accounts. One of the primary changes resulting from FATCA is that certain foreign entities could be required to provide investor information directly to the U.S. Internal Revenue Service (“IRS”), rather than simply holding such information for future audits under the current self-certification system. In general, FATCA applies to withholdable payments made after December 31, 2012.
In general, under the existing U.S. withholding regime, a foreign investor in the U.S. is subject to a statutory 30% withholding tax on certain types of investment income, unless they benefit from a specific domestic withholding tax exemption, such as the portfolio interest exemption, or they make a claim under an applicable double tax treaty to reduce the statutory withholding tax rate. Under FATCA, a 30% withholding is imposed on a withholdable payment made to a foreign entity that does not adhere to certain disclosure requirements. For this purpose, a withholdable payment includes not only the normal categories of U.S. source investment income paid to foreign persons but also includes gross proceeds from the sale or other disposition of securities or debt obligations that produce U.S. source dividends or interest. Thus, the new rules provide a significant departure from the existing regime by including gross proceeds from the sale or other disposition of certain property (of a type which can produce U.S. source interest or dividends) as a withholdable payment, subject to the 30% withholding tax.
Foreign entities subject to these rules include Foreign Financial Institutions and Foreign Non-Financial Entities.
Meijburg & Co continues to monitor developments around this new regime and how best to prepare for implementation. For additional information, please contact our US desk.