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By Edward Tanenbaum, Esq.
Alston & Bird LLP, New York, NY
Well, you were probably all in a state of anxiety, what without your annual dose of the Stop Tax Haven Abuse Act proposed legislation. Have no fear; it just arrived.
On July 12, 2011, Senator Carl Levin, once again, introduced his latest version of the Stop Tax Haven Abuse Act, S. 1346 ("Bill"), this time with lots of new juicy additions (and with some significant subtractions as well).1 Where the legislation will go is anyone's guess. While it's safe to say that Republicans will be opposed to many (but not all) of the provisions, its introduction at a time when Washington was negotiating deficit reduction issues can be viewed as low-hanging fruit if you believe the projected $100 billion per annum revenue projection. Remember the familiar tax legislation adage: "If the bill gets introduced a few times, it eventually becomes law."
Gone is the infamous and politically charged list of tax haven countries. That is a good thing. In its place, however, are a host of increased reporting provisions imposed on taxpayers and financial institutions alike as well as provisions that build upon the Hiring Incentives to Restore Employment Act ("HIRE Act") and, in particular, the Foreign Account Tax Compliance Act ("FATCA") (as if we haven't had enough to cherish in the "simplicity" of that legislation).
As to the HIRE Act and FATCA, the Bill proposes to clarify certain definitions and requirements of the FATCA disclosure legislation, i.e., inclusion of checking accounts within the disclosure requirements of financial institutions as well as assets in the form of derivatives and swap agreements; limiting the ability of the IRS to waive compliance by certain entities to only those that present a "low risk" of tax evasion; and a host of others.
In addition, the IRS would be given the authority to issue increased sanctions against foreign jurisdictions and foreign financial institutions, especially toward non-FATCA-compliant institutions, e.g., limiting such an institution's access to the U.S. markets through U.S. correspondent banks and prohibiting U.S. institutions from conducting transactions with such foreign institutions. There would also be imposed various rebuttable evidentiary presumptions against U.S. taxpayers themselves who form, maintain, or transfer assets to offshore accounts with non-FATCA institutions.
Third parties are again tasked with additional burdens under the Bill. For example, U.S. financial institutions (as well as foreign institutions doing business in the United States, and those participating in the Qualified Intermediary program) would be required to adhere to stricter account opening standards and to report (via Form 1099) the accounts of foreign entities known to be beneficially owned by U.S. persons. In addition, multinational corporations that are registered with the SEC would be required to report on their operations on a country-by-country basis, e.g., employees, sales, purchases, financing arrangements, and tax obligations.
Two interesting "loopholes" are also targeted. The first, involving credit default swaps, would treat payments made from the United States by counterparties on credit default swap payments as U.S.-source payments subject to withholding. The second, referred to as the "foreign subsidiary deposits" loophole, would treat as a §956 deemed dividend the deposit by a controlled foreign corporation of offshore funds in a U.S. bank account held in the name of the CFC.
There are also numerous other provisions in the Bill designed to enhance anti-money laundering programs and to deal with summons enforcement, tax shelters (and their promoters), and Circular 230 standards.
Perhaps the most substantive and far-reaching provision is the one dealing with corporations "managed and controlled" in the United States. As in prior versions, the Bill would treat as a domestic corporation any foreign corporation that is publicly traded or that has aggregate gross assets of $50 million or more, if it is managed and controlled in the United States. For purposes of determining whether the foreign corporation is "managed and controlled" in the United States, the Bill looks to the situs of the corporation's executive officers and senior management who exercise day-to-day responsibility for making strategic, financial, operational, and policy decisions.
In addition, in a direct attack against the hedge fund industry, Treasury would be directed to promulgate regulations that would provide that, with respect to corporations the assets of which consist primarily of assets being managed on behalf of investors, if investment decisions are being made in the United States, the management and control of the foreign entity would be treated as exercised in the United States.
Two exceptions would be available. The first would except from the application of this provision foreign corporations that are owned by U.S. parents with active businesses (on the theory that if the domestic parent is already actually engaged in business in the United States, then existing law should be respected). The second exception would be a carve-out for private companies that may have met the gross asset test, but then fall below that test in later years and do not expect to exceed that amount, provided that a waiver is obtained from the IRS.
Business groups are already weighing in on both sides of the aisle, so to speak. On the one side, small business groups are solidly behind any effort to end so-called "tax dodging" and to prevent small businesses from subsidizing large U.S. multinationals in pursuing perceived loopholes. On the other side, some business groups are rallying against any effort that might result in reduced investment in the United States with resulting job losses.
To be fair, with the deletion of the tax haven list, this version of the Bill is a bit more palatable. Indeed, many of the Bill's provisions are not inappropriate in that they reflect a good balance between administrative burdens and the war against tax evasion. Others, however, are extremely burdensome and reflect a view that tax benefits must, necessarily, be associated with tax dodging.
No one should have problems with certain of the clarifications being proposed with respect to FATCA definitional issues, nor should there be problems with certain of the evidentiary presumptions with respect to U.S. taxpayers themselves. On the other hand, is every non-FATCA institution evil and/or hiding accounts of U.S. persons, such that sanctions should be imposed? There need to be adequate safeguards. Should Treasury be bound by a per se rule that allows waivers from the FATCA legislation only in the case of "low risk" institutions or should a more balanced approach apply? And, with respect to complicated third-party reporting provisions, the Bill tests third parties' patience and their pocketbooks.
But it is the "managed and controlled" provisions of the Bill that should ring the alarm bells. It is true that some of our treaties have this requirement built into certain of the "limitation on benefits" provisions, e.g., the treaty with The Netherlands, and it is true that many countries provide for residency of entities based on management and control principles. However, there is no doubt that this would be a marked departure from existing U.S. tax law and involves a major policy issue (as did Congress' repeal of the "ten commandments") that needs to be adequately vetted in the context of overall international tax reform and not legislated in a piecemeal fashion. The latter approach got us to where we are now.
This commentary also will appear in the September 2011 issue of the Tax Management International Journal. For more information, in the Tax Management Portfolios, see Streng, 700 T.M., Choice of Entity, and Tello, 915 T.M., Payments Directed Outside the United States—Withholding and Reporting Provisions Under Chapters 3 and 4, and in Tax Practice Series, see ¶7110 U.S. International Taxation— General Principles, and ¶7170, U.S. International Withholding and Reporting Requirements.
1 A similar bill was introduced in the House on July 22, 2011, Rep. Lloyd Dogget.
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