Tuesday, March 23, 2010

President Obama Signs HIRE Act

On March 18, 2010 President Obama signed into law the "Hiring Incentives to Restore Employment Act" (the "Bill"), which contains a revised version of the Foreign Account Tax Compliance Act of 2009 (“FATCA”) that was first introduced on October 27, 2009 (for a discussion of FATCA please see our November 9, 2009 post entitled "Foreign Account Tax Compliance Act of 2009"). The withholding provisions of the Bill will apply to payments made after December 31, 2012. However, a grandfather rule exempts payments made under any obligation outstanding on the date that is 2 years after the enactment of the Bill from its withholding provisions. The foreign-targeted obligations provisions of the Bill apply to obligations issued after the date which is 2 years after the date of the enactment of the Bill. Finally, provision requiring withholding on “dividend equivalent payments" will apply to payments made on or after the date that is 180 days of the enactment of the Bill.

The full text of the act can be found here.

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House Passes Health Care Act Imposing New Taxes on High Income Taxpayers

On March 21, the House of Representatives passed the Health Care and Education Affordability Reconciliation Act of 2010 (the "Reconciliation Act"). The Reconciliation Act is expected to be passed by the Senate and signed into law by the President. The Reconciliation Act will impose a tax of 3.8 percent on the "net investment income" of individual taxpayers earning more than the threshold amount ($200,000 per year for single taxpayers or $250,000 for married taxpayers filing jointly). The Act defines net investment income to include income from interest, dividends, annuities, royalties and rents other than such income derived in the ordinary course of a trade or business as well as capital gains and income derived from passive activities within the meaning section 469 of the Internal Revenue Code. The 3.8 percent tax will only apply to net investment income to the extent that the taxpayer's adjusted gross income for the taxable years exceeds the threshold amount. The tax will be imposed on investment income earned after December 31, 2012.

The full text of the Reconciliation Act can be found here.

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Wednesday, March 17, 2010

FinCEN and IRS Provide Further Guidance on Reporting Requirements for Foreign Financial Accounts

On February 26, 2010, two branches of the U.S. Treasury Department addressed aspects of reporting investments in foreign funds.

The Financial Crimes Enforcement Network (“FinCEN”) issued proposed regulations addressing the Form TD F 90-22.1 (“FBAR”) reporting obligations of U.S. persons who hold interests in certain foreign “financial accounts.” Under these proposed rules, a “financial account” would include an interest in a “mutual fund or similar pooled fund which issues shares to the general public that have a regular net asset value determination and regular redemptions.” The proposed regulations explicitly reserve decision on the issue of whether hedge funds and private equity funds will be considered “financial accounts” for FBAR filing purposes. The proposed regulations indicate that the Treasury Department remains concerned about the use of foreign investment funds to evade taxes and that FinCEN will continue to study this issue. The proposed regulations also address many other issues, including confirming that a U.S. single-member limited liability company treated as a disregarded entity for U.S. federal income tax purposes is considered a U.S. person who generally must file an FBAR if it has an interest in a foreign financial account. The proposed regulations do not address the effective date of the new regulations if they become final.

Simultaneously, the Internal Revenue Service (“IRS”) released Notice 2010-13 (the “Notice”) and Announcement 2010-16 (the “Announcement”) to provide relief with respect to certain FBAR filing obligations for 2009 and prior years. The Notice provides that the IRS will not require U.S. persons to report any investment in foreign hedge funds or private equity funds for 2009 and earlier years. The Notice also extends the filing deadline to June 30, 2011 for any U.S. person with signature authority over, but no financial interest in, a foreign financial account with respect to years prior to 2010. In the Announcement, the IRS suspended FBAR reporting obligations with respect to 2009 and prior years for any person who is not a U.S. person as defined in the 2000 version of the FBAR form and instructions. Under that definition, a U.S. person is (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust. However, other than the definition of U.S. persons, all requirements in the 2008 version of the FBAR form and instructions (as modified by the Notice) remain in effect unless changed by future guidance. As reported in our client alert last year, the IRS has stated that investments in foreign funds should be treated as foreign financial accounts subject to FBAR reporting. Thus, unless additional guidance provides otherwise, investments in foreign funds in 2010 and thereafter would presumably have to be reported.

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