“The Thirty Percent Solution? FATCA Provisions of the HIRE Act”
On March 18, 2010, President Obama signed into law H.R. 2847, the Hiring Incentives to Restore Employment Act (P.L. 111-147) (the “HIRE Act”), which incorporates the measures designed to stop tax evasion of the Foreign Account Tax Compliance Act of 2009 (“FATCA”). The main objective behind FATCA is to aid efforts of the U.S. Treasury Department to track down so-called “fat cat” U.S. residents who evade U.S. taxes through the use of offshore financial accounts and investment vehicles.
To accomplish this, FATCA adds a new chapter 4 to the Code (Sections 1471-1474), which includes new information reporting and other requirements (the “Section 1471 Reporting Requirements”) designed to induce “foreign financial institutions,” offshore investment funds and most non-financial entities to report information to the U.S. Internal Revenue Service (the “IRS”) regarding their U.S. accountholders and investors. Foreign entities that are subject to FATCA face a stiff 30 percent withholding tax imposed on certain U.S. source income and income from the sale of certain U.S. assets. To encourage compliance with the Section 1471 Reporting Requirements, the 30 percent withholding tax does not apply to foreign financial institutions that comply with those requirements.
This Stroock Special Bulletin explores the reporting requirements imposed on foreign financial institutions by FATCA and, in particular, those provisions that are likely to have the most impact on offshore investment funds and their investors.