On December 9, 2009, as part of a package to extend certain expiring tax provisions, the US House of Representatives passed HR 4213 (the House Bill), a bill containing several of the international tax proposals first introduced in the Foreign Account Tax Compliance Act of 2009 (FATCA).1 Most notably, the House Bill contains a modified version of the withholding tax and information reporting proposals applicable to non-US financial institutions and also includes a provision that would tax carried interests as ordinary income. This alert only discusses the significant differences between the House Bill and FATCA relating to the information reporting and withholding tax provisions of each bill. It does not address the new proposal to tax carried interests as ordinary income.
FATCA would have imposed a 30 percent withholding tax on all US source payments (and broker proceeds) paid to a non-US financial institution if certain information reporting requirements were not satisfied by such non-US financial institution. The House Bill significantly reduces the impact of FATCA’s withholding tax provisions with respect to non-US account holders of non-US financial institutions by limiting the potential imposition of withholding tax to the payments attributable to “recalcitrant account holders.”2 In other words, the House Bill would not impose withholding tax on any portion of the US source payments made to a non-US financial institution that are attributable to accounts identified as accounts owned by non-US persons pursuant to rules that will be determined by the US Treasury Department (Treasury). The provision in FATCA that would apply a global due diligence standard by attributing knowledge of customer information among affiliates has been removed from the House Bill.
Additionally, the House Bill provides Treasury with discretion to create a “safe harbor” for certain non-US financial institutions that can certify that the institution has no “US accounts.” While this safe harbor provision may appear to be a concession, it is unclear what requirements would need to be satisfied in order to obtain this benefit.
The House Bill also permits Treasury to provide rules that would enable a non-US financial institution to elect to have the US withholding agent withhold any tax due. If such an election is made, the non-US financial institution would be required to provide a statement to the withholding agent that would indicate what portion of the payment is subject to this withholding tax. We expect that this statement would be similar to the withholding statements used in the QI program and would identify the portion of a payment that is attributable to recalcitrant account holders.
The House Bill modifies the exception for certain depository accounts owned by US persons by raising the reporting threshold from $10,000 to $50,000. Additionally, the House Bill contains an exception that does not require duplicative reporting of payments by each financial institution that has custody of a payment that is ultimately made to a US account.
The House Bill would be effective with respect to payments made after December 31, 2012, two years later than the proposed effective date of FATCA
For more information about this proposed legislation or any other matter raised in this Client Alert, please contact Jonathan A. Sambur at +1 202 263 3256, James R. Barry at +1 312 701 7169 or Donald C. Morris at +1 312 701 7126.
1. A summary of FATCA may be found at https://www.mayerbrown.com/publications/Foreign-Account-Tax-Compliance-Act-of-2009-Information-Reporting-for-US-Client-Accounts-at-Non-US-Financial-Institutions-11-05-2009/. For purposes of this client alert, we have assumed the reader is generally familiar with the provisions of FATCA.
2. The term “recalcitrant account holders” means account holders that fail to comply with reasonable requests to provide certain identifying information to the non-US financial institution, or that fail to provide a bank secrecy waiver that would enable the institution to conduct information reporting.