..."the" reason for today's moves (full statement here). I still do not understand how the U.S. will indentify U.S. citizens with foreign accounts in order to activate the witholding tax.
Another problem is that only "investments" are covered in the bill. So, for example, it "might be possible" (read: someone will do this STAT)for a foreign investment bank to offer a product that mimics the returns (but are not actually U.S. securities) on U.S. indices, DENOMINATED IN DOLLARS, without triggering the witholding conditions in the bill.
This may be the dawn of a new "EuroDow" market, mirroring the Eurodollar market (itself the product of regulatory challenges levied against USSR, IIRC), and is a strange move by the U.S. at a time when it thinks it needs foreign holdings to shore up demand for Treasuries.
Senate Floor Statement on the Enactment of the HIRE Act
Today President Obama signed into law the Hiring Incentives to Restore Employment Act (H.R. 2847), which will help put Americans back to work. More must be done on to help fight the unacceptably high unemployment rate, and I hope we can soon address other factors holding back our recovery, and particularly that we make it easier for businesses to obtain the funds they need to survive and grow.
While we work in Congress to get people back to work, I also want to take a moment to focus on another benefit of today’s new law.
The HIRE Act is a significant victory for law- abiding U.S. taxpayers, and a significant blow against those who dodge their responsibilities. The Permanent Subcommittee on Investigations, which I chair, has spent years investigating offshore tax abuses which together cost the federal treasury an estimated $100 billion in lost tax revenues annually. In addition to its provisions designed to help foster economic growth, the HIRE Act contains Foreign Account Tax Compliance provisions that represent a major new and positive development in the efforts to stop offshore banks from using secrecy laws to help U.S. taxpayers evade their taxes.
These offshore tax compliance provisions are the culmination of over a year’s worth of study, debate, and drafting efforts to protect America’s honest taxpayers. The drafting effort involved a host of Members of Congress from both the Senate Finance Committee and the House Ways and Means Committee, and the work drew upon multiple bills, including the Stop Tax Haven Abuse Act, S. 506, which I introduced with Senators McCaskill, Nelson, Whitehouse, Shaheen, and Sanders, and which Congressman Lloyd Doggett introduced in the House with 67 cosponsors. I would like to commend Senator Baucus and Congressman Rangel, in particular, for leading this drafting effort, and for involving us in producing a strong bill that President Obama is signing into law today.
This is a big bill, and its offshore tax provisions are complex. I want to provide some explanation of how this legislation is intended to work, both to guide the development of implementing regulations and to inform the courts of our legislative intent.
Section 501 on Foreign Bank Accounts
Section 501, “Reporting on Certain Foreign Accounts,” gives foreign financial institutions a choice. If those financial institutions hold U.S. investments of any variety -- from U.S. treasuries to U.S. stocks and bonds to debt and equity interests in U.S. businesses -- they must either pay a 30% withholding tax*** on their investment earnings, or disclose any and all accounts held by U.S. persons. The legislative intent behind this choice is to force foreign financial institutions to disclose their U.S. accountholders or pay a steep penalty for nondisclosure. The 30% will be withheld by a withholding agent in the United States before the funds are permitted to exit the U.S. financial system.
The reason for this strong approach was seen dramatically in hearings before the Permanent Subcommittee on Investigations. A July 2008 hearing, for example, showed how two foreign banks, UBS AG of Switzerland and LGT Bank of Liechtenstein, used a variety of secrecy tricks to help U.S. clients open foreign bank accounts and hide millions of dollars in assets from U.S. tax authorities. One 2004 UBS document indicated that 52,000 U.S. clients had Swiss accounts that had not been disclosed to the IRS. UBS estimated that those hidden accounts contained a total of about $18 billion in cash, securities, and other assets. In order to defer a criminal prosecution against the bank by the U.S. Department of Justice, UBS admitted that it had participated in a scheme to defraud the United States of tax revenues, paid a $750 million fine, and agreed to stop opening accounts that are not disclosed to the IRS. UBS also agreed to reveal the names of a limited number of U.S. accountholders, although the bulk of the 52,000 still may escape U.S. tax enforcement actions due to Swiss secrecy laws that continue to conceal their identities.
In order to avoid the 30% withholding tax, this new law will require each foreign financial institution to enter into an agreement with the Secretary of the Treasury to obtain and verify information which will make it possible for them to determine which of their accounts belong to U.S. account holders, report key information about those U.S. account holders, and comply with any request by the Treasury Secretary related to those U.S. accounts. The bill is written to end wide spread abuses. There are several issues that must be addressed in implementing this provision. For instance, it is clearly intended that the definition of foreign “financial institution” be applied broadly, to include banks, securities firms, money services businesses, money exchange houses, hedge funds, private equity funds, commodity traders, derivative dealers, and any other type of financial firm that holds, invests, or trades assets on behalf of itself or another person.
***"The Treasury will need to construct a withholding regime that will efficiently withhold the 30% tax on all U.S. investment earnings held by a noncooperative foreign financial institution. This statute will not be effective unless the 30% tax is withheld promptly, reliably, and in a comprehensive way. In devising this withholding regime, it is our purpose to apply the term “withholdable payment” broadly to cover all types of payments from sources in the United States, including interest payments, dividends, rents, wages, stock gains, and derivative payments originating in the United States."