The US has
enacted what may be the broadest tax and information reporting
legislation ever drafted. Unremarkably known as the Hiring
Incentives to Restore Employment Act of 2010 (the HIRE Act), the
legislation will affect almost every investor who invests into the
US or invests through any intermediary that has other clients who
invest into the US.
The Act is designed to reduce US
tax fraud by obtaining account information of US citizens, green
card holders and US tax residents investing through non-US
entities.
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The burden of identifying and
reporting such individuals has been placed on so-called ‘foreign
financial institutions’ (FFIs), an expansive term covering entities
from banks to hedge funds, trusts to family offices.
It is not surprising that such
broad legislation would leave its prints on non-US banks,
investment houses, brokerages, mutual funds and hedge funds. What
is surprising is that the Internal Revenue Service (IRS) appears
ready to extend the reach of the HIRE Act to life insurance
providers, trusts, family offices and privately owned investment
vehicles.
Flesh on the
bones
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By GlobalDataThe IRS took a first crack at
putting flesh on the bones of the HIRE Act by releasing Notice
2010-60 at the end August. The Notice has provided some guidance on
the mechanics of how financial institutions will need to identify
their clients and that is discussed below.
However, the IRS left open the
question as to how the HIRE Act will specifically apply to trusts,
family offices, trustees and funds.
The Notice implies that individual
trusts themselves will be classified as FFIs, although some ‘small’
family trusts may be exempted. This will mean that each individual
trust for which a trust company serves as trustee will have to
enter into a special agreement with the IRS.
These FFI agreements will need to
be agreed and implemented by 1 January 2013 or the FFI will face
two options: suffer 30% withholding tax on the gross proceeds of
all investment into the US or stop investing into the US.
Withholding tax
catch-all
The withholding tax would apply to
virtually all investments by the FFI into the US, whether made on
its own behalf or on behalf of its account holders, regardless of
whether or not they are US persons.
Clients who themselves have no
connection with the US will nevertheless be affected if they invest
via any FFI entering into one of these agreements.
As part of the agreement with the
IRS, FFIs will generally be required to disclose information
relating to ‘United States accounts’ (defined broadly) held by: (i)
a ‘specified United States person’ (this term includes most US
persons other than publicly traded corporations, certain
tax-favoured entities and US governmental entities); or (ii) a
‘US-owned foreign entity.’
As detailed by the Notice, such
disclosure will require extensive due diligence. For pre-existing
accounts held by individuals, FFIs will need to search their
electronic databases for ‘indicia of US status’ (including
citizenship, address, place of birth, instructions to transfer to
US accounts, etc).
Documentation required for
US individuals
For new accounts opened by
individuals, FFIs must obtain ‘documentary evidence’ establishing
the status of the individual. For individuals claiming non-US
status, the FFI must then cross-check this against ‘all other
information collected in connection with’ the new account
holder.
Where there are indicia that an
individual claiming non-US status has a US connection, further
documentation must be obtained to establish non-US status.
Many institutions are beginning to
accept that the HIRE Act cannot be ignored. In addition to
assembling teams to implement the new compliance requirements, some
institutions have already begun to implement ‘best practices’
before taking on additional US clients to avoid undertaking a
‘needle in a haystack’ search for lurking US individuals at a later
date.
Further, some US investors are
looking to eliminate ongoing US tax and reporting obligations by
terminating US residence, handing in a US green card or even
expatriating from the US. Handing in green cards or passports are
significant steps raising their own tax and reporting
considerations and underscore the far reaching implications of the
HIRE Act legislation.
Jay Krause is a partner and Chris McLemore is an associate
at Withers LLP in London. The authors can be contacted at:
jay.krause@withersworldwide.com and
chris.mclemore@withersworldwide.com.
