Capital, and all of its blessings, flows to where it is treated best. The recently passed Hiring Incentives to Restore Employment Act of 2010 (the "HIRE" Act) imposes new obstacles to the flow of capital into and out of the U.S. While ostensibly limited to "reporting" requirements to address offshore tax evasion by U.S. persons, at some point U.S. investors will balk at the level of reporting and forego profitable investments in the world at large, and foreign investors will simply move on to greener pastures and avoid the U.S. in making capital available. While such enforcement legislation may be considered to be tax revenue enhancing, the lost national revenue from reduced capital investment and tax compliance costs doesn't seem to be on anyone's radar screen – indeed, there is almost a complete absence of attention to the new rules in the national media. Once upon a time, U.S. tax policy was influenced by the impact of the tax code on U.S. economic growth and capital development – sadly for the U.S. economy, such concerns have taken a backseat in the ongoing campaign to root out tax dodgers.
I have prepared a general overview of the new provisions, which can be viewed here.
In addition to increasing the compliance burden of investors and businesses (including the imposition of foreign account disclosure requirements that essentially duplicate disclosures already required under FBAR reporting), the new provisions include several traps for the unwary. For example, U.S. persons that purchase stock of a U.S. corporation from a foreign entity are required to obtain certification regarding “substantial” U.S. ownership (or nonownership) of the foreign entity. If the U.S. person does not obtain the required certification, the U.S. buyer is obligated to withhold 30% of the purchase price from the foreign seller (at least that is how I read the new statute). If the U.S. buyer is not aware of these rules, the IRS can come after it for the 30% withholding even if the buyer has already fully paid the foreign seller. Tax and business counsel need to familiarize themselves with these rules to avoid the inadvertent application of these rules to their clients.