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By Kimberly Tan Majure and Michael Lloyd
The 2009 Tax Extenders Bill contains a revenue raiser entitled the Foreign Account Tax Compliance Act of 2009. First introduced in late October 2009, "FATCA" arose in the wake of the UBS tax evasion scandals, and represents a major move to shut down current avenues for U.S. tax evasion. A perennial problem, the sheer magnitude of U.S. individual tax evasion took center stage in the recent UBS banking scandal, in which the Swiss bank admitted to helping U.S. taxpayers hide over $20 billion in offshore accounts. The scandal catalyzed a swift response from Senator Finance Committee Chairman Max Baucus (D-Mont), House Ways and Means Committee Chairman Charles Rangel (D-NY), Senate Finance Committee member John Kerry (D-MA) and Ways and Means Select Revenue Subcommittee Chairman Richard Neal (D-MA).
FATCA takes a new approach to an old problem. Rather than spending IRS resources pursuing unknown tax evaders, the bill focuses on the smaller universe of potential hidey holes. Among other things, the bill would shut down foreign-targeted bearer bonds and would tag foreign banks with responsibility for disclosing their U.S. accountholders to the IRS. The latter is no small undertaking. Foreign banks would not only be required to identify and annually report their U.S. accounts to the IRS, they would also need to seek waivers from applicable bank secrecy rules or, failing that, to relinquish their U.S. accounts altogether. Those foreign banks that don't play along with the new FATCA rules would face a 30 percent tax -- not on income they handle on behalf of their U.S. accounts, but on their own U.S. investment income.
Historically, the U.S. cross-border withholding rules have focused on ensuring that U.S. taxes are paid by foreign persons, with respect to their U.S. source income. U.S. corporate issuers (and, in fact, any person having custody, control or receipt of an outbound payment) are responsible for withholding and remitting appropriate taxes to the IRS at the time that a cross-border payment is made. U.S. withholding agents that fail to withhold properly must themselves pay the missing taxes. FATCA applies the existing cross-border withholding rules in a new context -- to ensure that U.S. persons pay U.S. taxes.
By leaning on foreign banks to "put up or pay up," and by implicating the banks' own U.S. investment income, FATCA puts greater pressure on U.S. withholding agents. Under current rules, U.S. withholding agents need to secure tax paperwork (e.g., an IRS Form W-8BEN) from each foreign payee, and withhold accordingly. Under the new rules, U.S. withholding agents would also need to confirm whether a payee is FATCA-compliant -- or foot the bill for the missing 30 percent tax. Even in cases where a foreign bank ultimately owes no withholding taxes -- e.g., under an applicable tax treaty -- the U.S. agent could owe the IRS interest and penalties for failing to properly withhold in the first place.
Of greater concern for executive management, cross-border withholding failures can result in personal liability for financial executives, if a company's withholding failures are viewed as "willful." Willfulness, for these purposes, does not require an intentional violation of the law, but exists when a responsible person knew or should have known about an unpaid tax liability. Accordingly, financial executives have a direct and individual stake in ensuring the adoption and implementation of effective withholding procedures throughout their corporate organization, including accounts payable, treasury, IT, and other relevant departments.
If passed, FATCA would tag foreign banks as Congress's number one draft choice in the hunt for U.S. tax evaders, and would lean on U.S. companies as de facto enforcers. It's a strong message and a smart move, particularly when resources are tight and the Hill has other big spending priorities. But take note: Divvying up responsibility for U.S. anti-evasion measures doesn't make the job any smaller; it simply spreads the pain of doing it to the private sector. The new information reporting and withholding rules would apply to payments made after December 31, 2012. That sounds like a lot of time. Let's hope it's enough.
Kimberly Tan Majure focuses on international tax law, including cross-border structured finance, internal restructurings, acquisition planning and general planning, and controversy on inbound and outbound international tax matters at law firm Miller & Chevalier Chartered. Michael Lloyd practices in the areas of tax and employee benefits with a focus on federal and state tax issues, including matters related to cross-border payments, employment tax reporting, treatment of fringe benefits, executive compensation, penalty abatement, and general tax planning and controversy matters at law firm Miller & Chevalier Chartered.
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