As reported here on 8 March, the bill’s passage represents a success for certain US lawmakers who have been seeking to crack down on Americans who have offshore income they do not report.
In addition to affecting non-US institutions that have Americans as clients or investors, it could also affect investment fund companies, particularly those that invest in US equities, sources said.
Financial services industry observers also say the act will add to growing list of reasons non-US banks and other financial institutions may wish to avoid taking on or even keeping American clients. Already Americans are reporting difficulty in finding banks or financial services companies that are willing to have them as customers.
Withersworldwide, the international law group with offices in London, Geneva, the US and Hong Kong, said in a statement that the provisions buried in the so-called Hiring Incentives to Restore Employment (HIRE) Act of 2010 “will dramatically affect most non-US financial institutions, funds and collective investment structures as well as many trustees and family offices investing through these entities”.
The new regulations will give the US Internal Revenue Service (IRS) “new tools to find and prosecute US individuals that hide assets overseas”, Withersworldwide said.
The act primarily focuses on the creation of jobs through tax incentives. However, it contains numerous revenue-raising provisions that focus not only on US individuals who invest outside America, but also those investing in it, Withersworldwide noted.
Foreign Account Tax Compliance Act
As reported, the $17.5bn HIRE Act at some point in its progress through Congress subsumed an earlier piece of legislation known as the Foreign Account Tax Compliance Act, which in turn evolved out of the Stop Tax Haven Abuse Act of 2007.
That original bill was much publicised, in part because one of its two initial sponsors was then-Senator Barack Obama, who went on to make periodic references to offshore tax havens in some of his presidential campaign speeches.
In the US, the focus of press coverage has been on the HIRE Act’s aim to reduce the 9.7% jobless rate. In a report dated 18 March and carried in the New York Times, Reuters noted that the bill’s costs, aside from funds for a highway construction programme, were to be "offset by a crackdown on offshore tax shelters", but did not explain further.
Key Provisions
Key provisions of the act include:
• Significant modification of the US withholding tax and information reporting regimes affecting US taxpayers, non-US banks and other financial intermediaries and their affiliates, non-US hedge and private equity funds, and certain other non-US investment structures.
• New tax consequences on certain US taxpayers who use property held by non-US trusts.
• A number of new reporting obligations and penalties with respect to interests held by US taxpayers in non-US accounts, entities and trusts.
• Provisions to encourage so-called FFIs (foreign financial institutions) to report information about their US account holders to the IRS. The term "financial institution" is broadly defined here and generally includes non-US banks, hedge and private equity funds, and potentially certain privately-owned investment vehicles.
Other aspects of the act will increase the US tax burdens of some non-US persons, Withersworldwide noted.
“Arguably, certain of these provisions could be considered inconsistent with the US government’s previously stated goal of making the US capital markets attractive to non-US investors,” it said.
Invest to keep US clients
"If foreign banks or custodians want to continue working with US taxpayers, they are going to have to invest time, effort and money into significantly changing their client take-on process, client review process and their US tax reporting capabilities, among other things," said Josh Matthews, managing partner of Maseco Financial, who noted that many banks and custodians "simply don’t want to do this for what is typically a very small percentage of their client base."
Others, though, have ultra high net worth clients where only one or a few of the family members are US tax payers, "and they don’t want to lose the ‘family’ relationship," Matthews said.
Maseco, which is based in London but also has offices in Switzerland and New York, is an advisory firm specialising in looking after American expatriates, and which increasingly has been advising banks, custodians and trustees with American clients as well.
"Only a few of the trustees and custodians that we have spoken with even know they have a problem," Matthews added.
Clive Boothman, London representative for Jersey Finance, which represents the interests of Jersey’s financial services industry, said the bulk of US client assets on that island and Guernsey were unlikely to be significantly impacted by the legislation, “but the same may not be true of certain of the Caribbean centres and possibly also Switzerland”.
“This may be quite cumbersome to administer. I think the effect will be further to reduce the willingness of institutions outside the US to have US clients and also possibly to make direct investment into the US somewhat less attractive,” he added.
Charles Muller, deputy director general of Association of the Luxembourg Fund Industry, said "all asset managers should be aware that this new legislation now exists, and they should be prepared to follow how it will be implemented, because it could potentially have an impact on the way they do business."
At the very least, he said, they may have to confirm to the IRS that they do not have any US taxpayers among their investors, which, even though many funds currently bar Americans from investing, may not be a simple matter because some people have dual citizenship.
‘A simple choice’
In a statement last October, House Ways and Means Chairman and New York Senator Charles Rangel, one of the Foreign Account Tax Compliance Act’s sponsors, said it offered foreign banks “a simple choice – if you wish to access our capital markets, you have to report on U.S. account holders". Senate Finance Committee chairman and Montana Senator Max Baucus was the Foreign Account Tax Compliance Act’s s co-sponsor.
Ironically, Sen Rangel has come in for some criticism in recent weeks for, among other things, allegedly failing to report income from a condominium he owns in the Dominican Republic.
More information on FATCA and the HIRE Act may be found at http://hireact.org/ . The full text of the Hiring Incentives to Restore Employment Act (HR 2847) may be found here.
