HIRE Act Imposes Broad New Reporting Requirements and Withholding Tax on Foreign Entities

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On March 18, 2010, President Obama signed into law H.R. 2847, the Hiring Incentives to Restore Employment Act (HIRE). HIRE includes several provisions intended to stimulate hiring of U.S. workers, including payroll tax forgiveness and a business credit for companies with respect to certain newly hired persons. The costs of these provisions are projected to be offset, in part, by the enactment of key aspects of legislation that was previously introduced but not enacted (the Foreign Account Tax Compliance Act of 2009 (H.R. 3933, S. 1934)). These rules are designed to crack down on perceived tax avoidance by U.S. persons. Beginning in 2013, a 30% withholding tax will apply to most U.S. source payments (including any gross proceeds realized upon the sale of debt and equity investments in U.S. entities and payments of portfolio interest) made to foreign entities that fail to disclose detailed information about U.S. account holders and investors. The new reporting and withholding rules are intended to supplement the existing withholding and reporting rules with respect to payments of U.S. source income. However, the new rules introduce a host of new concepts and terms to the tax law, many of which are potentially far reaching. Detailed Treasury guidance will be necessary to implement these complex provisions and coordinate them with existing rules. Clients operating foreign private equity funds, hedge funds, and other foreign investment vehicles with U.S. investors, as well as investors in such entities, are likely to be impacted by the new reporting rules and should monitor these rules and forthcoming regulations closely.

There are several other tax-related provisions in HIRE, including new reporting requirements (and increased penalties for failures to comply) for individuals holding interests in foreign financial assets and certain foreign entities, rules imposing withholding tax on synthetic dividend payments under certain derivative contracts, and provisions that adversely affect the tax treatment of interest paid on bearer bonds. The effective dates of these provisions vary.

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