There are a lot of people in Washington D.C. that believe there are massive numbers of U.S. taxpayers who are avoiding U.S income taxes through offshore accounts and entities. To attack this avoidance, as part of the Hiring Incentives to Restore Employment Act of 2010 (HIRE Act, P.L. 111-147, 3/18/2010) the Foreign Account Tax Compliance Act (FATCA) installed a new withholding tax and reporting regime on various payments to offshore entities. In October, the IRS issued Notice 2010-60 to provide some guidance on how the new provisions will apply (the new provisions commence operation in 2013).
The new provisions and the IRS’ planned implementation rules boarder on the incomprehensible. They are the height of “bureacracyspeak.” Rules exist, subject to exceptions, which are themselves subject to additional exceptions. The rules contain definitions, which to determine their application, require the application of other definitions. Payors and offshore financial institutions have to run through a gauntlet of determinations regarding the status of accounts, payees, and various categories of taxpayers.
Those seeking to apply the rules will have to master the following new terms and definitions:
-Financial Account. Code §1471(d)(2).
-Financial Institution (FI). Code §1471(d)(5).
-Foreign Financial Institution (FFI). Code §1471(d)(4).
-Non-Financial Foreign Entity (NFFE).
-Recalcitrant Account Holder. Code §1471(d)(6).
-Specified United States Person (Code §1473(3)).
-Substantial United States Owner. (Section 1473(2))
-United States Account. Code §1471(d)(1).
-United States Owned Foreign Entity. Code §1471(d)(3).
-Withholdable Payment (Code §1473(1)):
-Withholding Agent (Code §1473(4).
A payor of a payment that may be subject to withholding will have to make determinations place the payee and/or the payment into one of the following 9 categories:
- U.S. Entity Payee (no withholding).
- Participating FFI (no withholding).
- Code §1471(f) entity (no withholding).
- Deemed compliant FFI (no withholding & will not be a NFFE).
- Nonparticipating FFI (withholding).
- NFFE Payee.
- Excepted NFFE (no withholding).
- Code §1472(c)(2) low risk entity (no withholding).
- Other NFFE (withholding).
Undoubtably, there will be a number of offshore entities that legitimately invest in the U.S. that will say to heck with this, and cease to invest in the U.S. or in its securities markets, rather than attempt to comply with this monster or be burdened by its withholding taxes. Yet there has been hardly a mention in the financial press of the potential deleterious effects of these new provisions – both as to compliance costs and the loss of capital investment in the U.S. Ah, for the good old days when Congress considered the impact of its legislation on the U.S. economy.