US legislation aimed at spurring employment contains a
nasty surprise for wealth managers abroad as the US government
attempts to curb offshore non-compliance by US taxpayers. Charles
Davis finds out that many wealth managers are not wary enough of
its wide-ranging impact.
Go deeper with GlobalData
The US Hiring Incentives to Restore Employment (HIRE) Act,
which President Obama signed into law on 18 March, also contains a
little-noticed foreign account provision that will impose expansive
new information reporting and compliance requirements on foreign
financial institutions and other foreign persons.
The new law requires financial institutions to
identify and disclose US account holders, or become subject to a
new 30% US withholding tax regime with respect to any payment of US
source investment income and proceeds from the sale of equity or
debt instruments of US issuers.
Foreign bankers, private equity and hedge funds
managers, wealth managers and advisers to high net worth
individuals outside the US are realising that they need to know
what the law, which comes into effect in 2012, means for their
institutions and clients.
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By GlobalDataUnder the radar
“You wonder whether, despite what you hear,
that there is no uptick in hiring. We just have not seen much
response to the US HIRE Act at all,” says Bennett Pine, a partner
at Anderson Kill & Olick in New York and a specialist in
employment law compliance. “It just has flown under the radar thus
far.”
Louis Marett is co-chair of the Tax
Group at Choate, Hall & Stewart in Boston, which specialises in
wealth management. He has been amazed at the lack of response to
the law so far.
“Any time any US payer pays funds to a non-US
entity, they are going to have withhold 30%, and if they get it
wrong, they are responsible for the 30%,” says Marett, who
specialises in the structuring of private equity and venture funds
and alternate investment vehicles, both domestic and offshore. “If
you want to have banking relationships in the US, we are going to
make you go up the chain and tell us who your customers are.”
Implications ‘not sunk in’
Marett says that the US HIRE Act is “more
intrusive than any piece of tax legislation I can think of outside
the borders of the US”, adding that the implications have not yet
begun to sink in abroad.
“When the global wealth management industry
figures this out, there will be significant pushback,” he says.
“Lots of people are going to find out for the first time when they
get a 30% withholding notice.”
The foreign account provision seeks to catch
Americans using foreign financial institutions to evade US taxes.
It requires non-US asset managers, hedge funds, private equity
funds and trusts to verify with the US Treasury whether their
clients are US taxpayers.
The US HIRE Act also imposes a 30% withholding
requirement, beginning in 2013, on certain payments to a non-US
entity that is not a financial institution if the entity or the
beneficial owner of the payment does not provide certain
certifications regarding any US owners of the payment.
In addition, it adds new reporting requirements
for US citizens who own interests in certain non-US financial
assets (including any interests in a non-US entity that is not held
through a US financial institution) that exceed $50,000 in value,
and for US shareholders of a passive foreign investment company as
detailed by the US Internal Revenue Service.
Dividend equivalent
payments
The law also treats “dividend equivalent”
payments as being payments from US sources subject to 30%
withholding (or a lower applicable treaty) rate. Dividend
equivalent payments include payments made in connection with
securities lending transactions that reference US issuers and
notional principal contracts payments determined by reference to US
issuers.
Payments for the purpose of triggering the
reporting requirements are defined to include virtually all items
of income from US sources as well as gain realised with respect to
dividend paying shares or interest bearing instruments.
The precise form and scope of the reporting
requirement and the certification that will need to be provided to
US payers to avoid the withholding requirement will need to be
developed by the service in regulations, Marett says.
These provisions create significant changes in
the rules governing foreign trusts and their trustees, resulting in
a new category of deemed distributions of foreign trust property
and a broader application of the rules that treat contributors to
foreign trusts as the owner of the trust for income tax
purposes.
Compliance catch-all
James Reardon is a partner in the
private equity practice of Bracewell & Giuliani LLP, whose
speciality areas includes the taxation of cross-border
transactions. In a note to clients he says that “fund managers,
even those with no direct US connection, should review the legal
entity structure of their entire fund group with a view to
identifying which of the group’s funds will become subject to these
new information reporting and withholding rules.”
One could assume that any foreign fund with US
securities and commodity investments held directly or indirectly,
needs to prepare for compliance, Reardon adds.
“Inadvertent non-compliance with the new rules
will lead to a 30% withholding tax on interest otherwise entitled
to the ‘portfolio interest exemption’ as well as capital gains
[gross proceeds] otherwise sourced outside of the US tax
jurisdiction,” Reardon notes. “The magnitude of the potential tax
cost on investment vehicles, depending on their legal structure, is
sure to influence fund operations.”
Marett says that’s an understatement.
“The US HIRE Act truly is breathtaking in
scope,” Marett concludes. “It’s going to create massive compliance
burdens on every foreign institution doing wealth management work
of any kind in the US.”
