Reporting,Withholding, and More Reporting: HIRE Act Reporting and Withholding Provisions

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INTRODUCTION

With the March 18, 2010, enactment of Chapter 4 (Taxes to Enforce Reporting on Certain Foreign Accounts) of the U.S. Internal Revenue Code of 1986, as amended, additional complexity has been introduced to the already complicated withholding and reporting rules under existing Chapters 3 and 61. The Chapter 4 provisions apply not only to traditional fixed or determinable annual or periodical (FDAP) income, but also to capital gains from the disposition of assets that produce FDAP income. Moreover, the new provisions relating to ‘‘dividend equivalent’’ payments will subject to both Chapters 3 and 4 gross payments not only from stock loans and repo transactions but also from notional principal contracts, even if no actual payment is made.

While the Chapter 4 rules are extremely broad in their application, some statutory exceptions and regulatory authority to provide further exceptions have been provided to ameliorate some of the obvious concerns relating to noninvestment income and duplicative reporting. Effectively connected income has been statutorily exempted from the application of the Chapter 4 provisions. Additionally, it may be anticipated that regulations will exempt vendor payments made to foreign entities for goods and services in the ordinary course of business. Moreover, it also may be anticipated that regulations will also exempt payments to foreign finance subsidiaries of non-financial operating companies. It should be noted that payments made directly to an individual (and not through a foreign entity) are not subject to Chapter 4.

The level of reporting that has been introduced not only by the Chapter 4 provisions but also by §§6038D and 1248(f), together with the existing reporting required on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), would, without regulations to alleviate duplicative reporting of the same payments and the same income, result in administrative and compliance issues that could be unmanageable for taxpayers — and moreover, for the Internal Revenue Service (IRS). Recently proposed regulations providing guidance on FBAR reporting indicate that the Department of the Treasury and the IRS are sensitive to duplicative reporting concerns.

A new reporting provision was enacted with respect to U.S. owners of foreign trusts under §6048(b)(1), as well as some clarifying amendments under §679(c) to identify beneficiaries of foreign trusts. Those provisions are beyond the scope of this discussion, but do address Congressional concerns related to the new reporting requirements.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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