Code Section 1473

Code Section	Effective Date	Name of Act	Name of Provision	10yr Revenue Estimate ($millions)
1471-1474 and 6611	*See Note Below	The Hiring Incentives to Restore Employment Act	Reporting on certain foreign accounts	8,714

* Notes on Effective Date

The provision generally applies to payments made after December 31, 2012. The provision, however, does not require any amount to be deducted or withheld from any payment under any obligation outstanding on the date that is two years after the date of enactment (March 18, 2010), or from the gross proceeds from any disposition of such an obligation. It is anticipated that the Secretary may provide guidance as to the application of the material modification rules under section 1001 in determining whether an obligation is considered to be outstanding on the date that is two years after the date of enactment (March 18, 2010). The interest provisions increasing the grace period for which the government is not required to pay interest on an overpayment from 45 to 180 days apply to: (1) returns with due dates after the date of enactment (March 18, 2010); (2) claims for credit or refund of overpayment filed after the date of enactment (March 18, 2010); and (3) refunds paid on adjustments initiated by the Secretary paid after the date of enactment (March 18, 2010).

Reporting on certain foreign accounts

Topics

Withholdable payments to foreign financial institutions
Withholdable payments to other foreign entities
Credits and refunds
General provisions

Explanation of Provision

The provision adds a new chapter 4 to the Code that provides for withholding taxes to enforce new reporting requirements on specified foreign accounts owned by specified United States persons or by United States owned foreign entities. The provision establishes rules for withholdable payments to foreign financial institutions and for withholdable payments to other foreign entities.

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1. Withholdable payments to foreign financial institutions

The provision requires a withholding agent to deduct and withhold a tax equal to 30 percent on any withholdable payment made to a foreign financial institution if the foreign financial institution does not meet certain requirements. Specifically, withholding is generally not required if an agreement is in effect between the foreign financial institution and the Secretary of the Treasury (the ‘‘Secretary’’) under which the institution agrees to:

Obtain information regarding each holder of each account maintained by the institution as is necessary to determine which accounts are United States accounts;
Comply with verification and due diligence procedures as the Secretary requires with respect to the identification of United States accounts;
Report annually certain information with respect to any United States account maintained by such institution;
Deduct and withhold 30 percent from any pass-thru payment that is made to a (1) recalcitrant account holder or another financial institution that does not enter into an agreement with the Secretary, or (2) foreign financial institution that has elected to be withheld upon rather than to withhold with respect to the portion of the payment that is allocable to recalcitrant account holders or to foreign financial institutions that do not have an agreement with the Secretary.
Comply with requests by the Secretary for additional information with respect to any United States account maintained by such institution; and
Attempt to obtain a waiver in any case in which any foreign law would (but for a waiver) prevent the reporting of information required by the provision with respect to any United States account maintained by such institution, and if a waiver is not obtained from each account holder within a reasonable period of time, to close the account.

If the Secretary determines that the foreign financial institution is out of compliance with the agreement, the agreement may be terminated by the Secretary. The provision applies with respect to United States accounts maintained by the foreign financial institution and, except as provided by the Secretary, to United States accounts maintained by each other financial institution that is a member of the same expanded affiliated group (other than any foreign financial institution that also enters into an agreement with the Secretary).

It is expected that in complying with the requirements of this provision, the foreign financial institution and the other members of the same expanded affiliated group comply with know-your-customer, anti-money laundering, anti-corruption, or other similar rules to which they are subject, as well as with such procedures and rules as the Secretary may prescribe, both with respect to due diligence by the foreign financial institution and verification by or on behalf of the IRS to ensure the accuracy of the information, documentation, or certification obtained to determine if the account is a United States account. The Secretary may use existing know your-customer, anti-money laundering, anti-corruption, and other regulatory requirements as a basis in crafting due diligence and verification procedures in jurisdictions where those requirements provide reasonable assurance that the foreign financial institution is in compliance with the requirements of this provision.

The provision allowing for withholding on payments made to an account holder that fails to provide the information required under this provision is not intended to create an alternative to information reporting. It is anticipated that the Secretary may require, under the terms of the agreement, that the foreign financial institution achieve certain levels of reporting and make reasonable attempts to acquire the information necessary to comply with the requirements of this section or to close accounts where necessary to meet the purposes of this provision. It is anticipated that the Secretary may also require, under the terms of the agreement that, in the case of new accounts, the foreign financial institution may not withhold as an alternative to collecting the required information.

A foreign financial institution may be deemed, by the Secretary, to meet the requirements of this provision if: (1) the institution complies with procedures prescribed by the Secretary to ensure that the institution does not maintain United States accounts, and meets other requirements as the Secretary may prescribe with respect to accounts of other foreign financial institutions, or (2) the institution is a member of a class of institutions for which the Secretary has determined that the requirements are not necessary to carry out the purposes of this provision. For instance, it is anticipated that the Secretary may provide rules that would permit certain classes of widely held collective investment vehicles, and to the limited extent necessary to implement these rules, the entities providing administration, distribution and payment services on behalf of those vehicles, to be deemed to meet the requirements of this provision. It is anticipated that a foreign financial institution that has an agreement with the Secretary may meet the requirements under this provision with respect to certain members of its expanded affiliated group if the affiliated foreign financial institution complies with procedures prescribed by the Secretary and does not maintain United States accounts. Additionally, the Secretary may identify classes of institutions that are deemed to meet the requirements of this provision if such institutions are subject to similar due diligence and reporting requirements under other provisions in the Code. Such institutions may include certain controlled foreign corporations owned by U.S. financial institutions and certain U.S. branches of foreign financial institutions that are treated as U.S. payors under present law.

Under the provision, a foreign financial institution may elect to have a U.S. withholding agent or a foreign financial institution that has entered into an agreement with the Secretary withhold on payments made to the electing foreign financial institution rather than acting as a withholding agent for the payments it makes to other foreign financial institutions that either do not enter into agreements with the Secretary or that themselves have elected not to act as a withholding agent, or for payments it makes to account holders that fail to provide required information. If the election under this provision is made, the withholding tax will apply with respect to any payment made to the electing foreign financial institution to the extent the payment is allocable to accounts held by foreign financial institutions that do not enter into an agreement with the Secretary or to payments made to recalcitrant account holders.

A payment may be allocable to accounts held by a recalcitrant account holder or a foreign financial institution that does not meet the requirements of this section either as a result of such person holding an account directly with the electing foreign financial institution, or in relation to an indirect account held through other foreign financial institutions that either do not enter into an agreement with the Secretary or are themselves electing foreign financial institutions.

The electing foreign financial institution must notify the withholding agent of its election and must provide information necessary for the withholding agent to determine the appropriate amount of withholding. The information may include information regarding the amount of any payment that is attributable to a withholdable payment and information regarding the amount of any payment that is allocable to recalcitrant account holders or to foreign financial institutions that have not entered into agreements with the Secretary. Additionally, the electing foreign financial institution must waive any right under a treaty with respect to an amount deducted and withheld pursuant to the election. To the extent provided by the Secretary, the election may be made with respect to certain classes or types of accounts.

A foreign financial institution meets the annual information reporting requirements under the provision by reporting the following information:

The name, address, and TIN of each account holder that is a specified United States person;
The name, address, and TIN of each substantial United States owner of any account holder that is a United States owned foreign entity;
The account number;
The account balance or value (determined at such time and in such manner as the Secretary provides); and
Except to the extent provided by the Secretary, the gross receipts and gross withdrawals or payments from the account (determined for such period and in such manner as the Secretary may provide).

This information is required with respect to each United States account maintained by the foreign financial institution and, except as provided by the Secretary, each United States account maintained by each other foreign financial institution that is a member of the same expanded affiliated group (other than any foreign financial institution that also enters into an agreement with the Secretary).

Alternatively, a foreign financial institution may make an election and report under sections 6041 (information at source), 6042 (returns regarding payments of dividends and corporate earnings and profits), 6045 (returns of brokers), and 6049 (returns regarding payments of interest), as if such foreign financial institution were a U.S. person (i.e., elect to provide full IRS Form 1099 reporting under these sections). Under this election, the foreign financial institution reports on each account holder that is a specified United States person or United States owned foreign entity as if the holder of the account were a natural person and citizen of the United States. As a result, both U.S.- and foreign-source amounts (including gross proceeds) are subject to reporting under this election regardless of whether the amounts are paid inside or outside the United States. If a foreign financial institution makes this election, the institution is also required to report the following information with respect to each United States account maintained by the institution:

(1) the name, address, and TIN of each account holder that is a specified United States person; (2) the name, address, and TIN of each substantial United States owner of any account holder that is a United States owned foreign entity; and (3) the account number. This election can be made by a foreign financial institution even if other members of its expanded affiliated group do not make the election. The Secretary has authority to specify the time and manner of the election and to provide other conditions for meeting the reporting requirements of the election.

Foreign financial institutions that have entered into QI or similar agreements with the Secretary, under section 1441 and the regulations thereunder, are required to meet the requirements of this provision in addition to any other requirements imposed under the QI or similar agreement.

Under the provision, a United States account is any financial account held by one or more specified United States persons or United States owned foreign entities. Depository accounts are not treated as United States accounts for these purposes if (1) each holder of the account is a natural person and (2) the aggregate value of all depository accounts held (in whole or in part) by each holder of the account maintained by the financial institution does not exceed $50,000. A foreign financial institution may, however, elect to include all depository accounts held by U.S. individuals as United States accounts. To the extent provided by the Secretary, financial institutions that are members of the same expanded affiliated group may be treated as a single financial institution for purposes of determining the aggregate value of depository accounts maintained at the financial institution.

In addition, a financial account is not a United States account if the account is held by a foreign financial institution that has entered into an agreement with the Secretary or is otherwise subject to information reporting requirements that the Secretary determines would make the reporting duplicative. It is anticipated that the Secretary may exclude certain financial accounts held by bona fide residents of any possession of the United States maintained by a financial institution organized under the laws of the possession if the Secretary determines that such reporting is not necessary to carry out the purposes of this provision.

Except as otherwise provided by the Secretary, a financial account is any depository or custodial account maintained by a foreign financial institution and, any equity or debt interest in a foreign financial institution (other than interests that are regularly traded on an established securities market). Any equity or debt interest that is treated as a financial account with respect to any financial institution is treated for purposes of this provision as maintained by the financial institution. It is anticipated that the Secretary may determine that certain short-term obligations, or short-term deposits, pose a low risk of U.S. tax evasion and thus, may not treat such obligations or deposits as financial accounts for purposes of this provision.

A United States owned foreign entity is any foreign entity that has one or more substantial United States owners. A foreign entity is any entity that is not a U.S. person.

A foreign financial institution is any financial institution that is a foreign entity, and except as provided by the Secretary, does not include a financial institution organized under the laws of any possession of the United States. The Secretary may exercise its authority to issue guidance that it deems necessary to prevent financial institutions organized under the laws of U.S. possessions from being used as intermediaries in arrangements under which U.S. tax avoidance or evasion is facilitated.

Except as otherwise provided by the Secretary, a financial institution for purposes of this provision is any entity that (1) accepts deposits in the ordinary course of a banking or similar business; (2) as a substantial portion of its business, holds financial assets for the account of others; or (3) is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities,⁵²⁴ interests in partnerships, commodities, ⁵²⁵ or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities. Accordingly, the term financial institution may include among other entities, investment vehicles such as hedge funds and private equity funds. Additionally, the Secretary may provide exceptions for certain classes of institutions. Such exceptions may include entities such as certain holding companies, research and development subsidiaries, or financing subsidiaries within an affiliated group of non-financial operating companies. It is anticipated that the Secretary may prescribe special rules addressing the circumstances in which certain categories of companies, such as certain insurance companies, are financial institutions, or the circumstances in which certain contracts or policies, for example annuity contracts or cash value life insurance contracts, are financial accounts or United States accounts for these purposes.

For purposes of this provision, a recalcitrant account holder is any account holder that (1) fails to comply with reasonable requests for information necessary to determine if the account is a United States account; (2) fails to provide the name, address, and TIN of each specified United States person and each substantial United States owner of a United States owned foreign entity; or (3) fails to provide a waiver of any foreign law that would prevent the foreign financial institution from reporting any information required under this provision.

A passthru payment is any withholdable payment or other payment to the extent it is attributable to a withholdable payment.

The reporting requirements apply with respect to United States accounts maintained by a foreign financial institution and, except as otherwise provided by the Secretary, with respect to United States accounts maintained by each other foreign financial institution that is a member of the same expanded affiliated group as such foreign financial institution. An expanded affiliated group for these purposes is an affiliated group as defined in section 1504(a) except that ‘‘more than 50 percent’’ is substituted for ‘‘at least 80 percent’’ each place it appears in that section, and is determined without regard to paragraphs (2) and (3) of section 1504(b). A partnership or any other entity that is not a corporation is treated as a member of an expanded affiliated group if such entity is controlled by members of such group.⁵²⁶

This provision does not apply with respect to a payment to the extent that the beneficial owner of such payment is (1) a foreign government, a political subdivision of a foreign government, or a wholly owned agency of any foreign government or political subdivision; (2) an international organization or any wholly owned agency or instrumentality thereof; (3) a foreign central bank of issue; or (4) any other class of persons identified by the Secretary as posing a low risk of U.S. tax evasion.

Under the provision, a withholding agent includes any person, in whatever capacity, having the control, receipt, custody, disposal, or payment of any withholdable payment.

Except as provided by the Secretary, a withholdable payment is any payment of interest (including any original issue discount), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income from sources within the United States. The term also includes any gross proceeds from the sale or other disposition of any property that could produce interest or dividends from sources within the United States, including dividend equivalent payments treated as dividends from sources in the United States pursuant to section 541 of the Act. Any item of income effectively connected with the conduct of a trade or business within the United States that is taken into account under sections 871(b)(1) or 882(a)(2) is not treated as a withholdable payment for purposes of the provision. In determining the source of a payment, section 861(a)(1)(B) (the rule for sourcing interest paid by foreign branches of domestic financial institutions) does not apply. The Secretary may determine that certain payments made with respect to short-term debt or short-term deposits, including gross proceeds paid pose little risk of United States tax evasion and may be excluded from withholdable payments for purposes of this provision.

A substantial United States owner is: (1) with respect to any corporation, any specified U.S. person that directly or indirectly owns more than 10 percent of the stock (by vote or value) of such corporation; (2) with respect to any partnership, a specified United States person that directly or indirectly owns more than 10 percent of the profits or capital interests of such partnership; and (3) with respect to any trust, any specified United States person treated as an owner of any portion of such trust under the grantor trust rules,⁵²⁷ or to the extent provided by the Secretary, any specified United States person that holds, directly or indirectly, more than 10 percent of the beneficial interests of the trust. To the extent the foreign entity is a corporation or partnership engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, interests in partnerships, commodities, or any interest (including a futures or forward contract or option) in such securities, interests or commodities, the 10-percent threshold is reduced to zero percent. In determining whether an entity is a United States owned foreign entity (and whether any person is a substantial United States owner of such entity), only specified United States persons are considered.

Except as otherwise provided by the Secretary, a specified United States person is any U.S. person other than (1) a publicly traded corporation or a member of the same expanded affiliated group as a publicly traded corporation, (2) any tax-exempt organization or individual retirement plan, (3) the United States or a wholly owned agency or instrumentality of the United States, (4) a State, the District of Columbia, any possession of the United States, or a political subdivision or wholly owned agency of a State, the District of Columbia, or a possession of the United States, (5) a bank,⁵²⁸ (6) a real estate investment trust,⁵²⁹ (7) a regulated investment company, ⁵³⁰ (8) a common trust fund,⁵³¹ and (9) a trust that is exempt from tax under section 664(c) ⁵³² or is described in section 4947(a)(1).⁵³³

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2. Withholdable payments to other foreign entities

The provision requires a withholding agent to deduct and withhold a tax equal to 30 percent of any withholdable payment made to a non-financial foreign entity if the beneficial owner of such payment is a non-financial foreign entity that does not meet specified requirements.

A non-financial foreign entity is any foreign entity that is not a financial institution under the provision. A non-financial foreign entity meets the requirements of the provision (i.e., payments made to such entity will not be subject to the imposition of 30-percent withholding tax) if the payee or the beneficial owner of the payment provides the withholding agent with either a certification that the foreign entity does not have a substantial United States owner, or provides the withholding agent with the name, address, and TIN of each substantial United States owner. Additionally, the withholding agent must not know or have reason to know that the certification or information provided regarding substantial United States owners is incorrect, and the withholding agent must report the name, address, and TIN of each substantial United States owner to the Secretary.

The provision does not apply to any payment beneficially owned by a publicly traded corporation or a member of an expanded affiliated group of a publicly traded corporation (defined as above but without the inclusion of partnerships or other non-corporate entities). Publicly traded corporations (and their affiliates) receiving payments directly from U.S. withholding agents may present a lower risk of U.S. tax evasion than other non-financial foreign entities. The provision also does not apply to any payment beneficially owned by any: (1) entity that is organized under the laws of a possession of the United States and that is wholly owned by one or more bona fide residents of the possession; (2) foreign government,
political subdivision of a foreign government, or wholly owned agency or instrumentality of any foreign government or political subdivision of a foreign government; (3) international organization or any wholly owned agency or instrumentality of an international organization; (4) foreign central bank of issue; (5) any other class of persons identified by the Secretary for purposes of the provision; or (6) class of payments identified by the Secretary as posing a low risk of U.S. tax evasion. It is anticipated that the Secretary may exclude certain payments made for goods, services, or the use of property if the payment is made pursuant to an arm’s length transaction in the ordinary course of the payor’s trade or business. It is expected that the Secretary will provide coordinating rules for application of the withholding provisions applicable to foreign financial institutions and to foreign entities that are non-financial foreign entities under this provision.

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3. Credits and refunds

In general, the determination of whether an overpayment of tax deducted and withheld under the provision results in an overpayment by the beneficial owner of the payment is made in the same manner as if the tax had been deducted and withheld under subchapter A of chapter 3 (withholding tax on nonresident aliens and foreign corporations). An amount of tax required to be withheld by a foreign financial institution under its agreement with the Secretary is treated the same as if it were required to be withheld on a withholdable payment made to a foreign financial institution that does not enter into an agreement with the Secretary. Under the provision, if a beneficial owner of a payment is entitled under an income tax treaty to a reduced rate of withholding tax on the payment, that beneficial owner may be eligible for a credit or refund of the excess of the amount withheld under the provision over the amount permitted to be withheld under the treaty. Similarly, if a payment is of an amount not otherwise subject to U.S. tax (because, for instance, the payment represents gross proceeds from the sale of stock or is interest eligible for the portfolio interest exemption), the beneficial owner of the payment generally is eligible for a credit or refund of the full amount of the tax withheld.

The Secretary has the authority to administer credit and refund procedures which may include requirements for taxpayers claiming credits or refunds of amounts withheld from payments to which the provision applies to supply appropriate documentation establishing that they are the beneficial owners of the payments from which tax was withheld, and that, in circumstances in which treaty benefits are being claimed, they are eligible for treaty benefits. No credit or refund is allowed with respect to tax properly deducted and withheld unless the beneficial owner of the payment provides the Secretary with such information as the Secretary may require to determine whether the beneficial owner of the payment is a United States owned foreign entity and the identity of any substantial United States owners of such entity. It is intended that any such guidance provided by the Secretary under this provision, including documentation and requirements to provide information, be consistent with existing income tax treaties.

If tax is withheld under the provision, this credit and refund mechanism ensures that the provisions are consistent with U.S. obligations under existing income tax treaties. U.S. income tax treaties do not require the United States and its treaty partners to follow a specific procedure for providing treaty benefits.⁵³⁴ For example, in cases in which proof of entitlement to treaty benefits is demonstrated in advance of payment, the United States may permit reduced withholding or exemption at the time of payment. Alternatively, the United States may require withholding at the relevant statutory rate at the time of payment and allow treaty country residents to obtain treaty benefits through a refund process. The credit and refund mechanism ensures that residents of treaty partners continue to obtain treaty benefits in the event tax is withheld under the provision.

A special rule applies with respect to any tax properly deducted and withheld from a specified financial institution payment, which is defined as any payment with respect to which a foreign financial institution is the beneficial owner. Credits and refunds with respect to specified financial institution payments generally are not allowed. However, refunds and credits are allowed if, with respect to the payment, the foreign financial institution is entitled to an exemption or a reduced rate of tax by reason of any treaty obligation of the United States. In such a case, the foreign financial institution is entitled to an exemption or a reduced rate of tax only to the extent provided under the treaty. In no event will interest be allowed or paid with respect to any credit or refund of tax properly withheld on a specified financial institution payment.

Under the provision, the grace period for which the government is not required to pay interest on an overpayment is increased from 45 days to 180 days for overpayments resulting from excess amounts deducted and withheld under chapters 3 or 4 of the Code. The increased grace period applies to refunds of withheld taxes with respect to (1) returns due after the date of enactment (March 18, 2010), (2) claims for refund filed after date of enactment (March 18, 2010) and (3) IRS-initiated adjustments if the refunds are paid after the date of enactment (March 18, 2010) . It is anticipated that the Secretary may specify the proper form and information required for a claim for refund under section 6611(e)(2) and may provide that a purported claim that does not include such information is not considered filed.

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4. General provisions

Every person required to deduct and withhold any tax under the provision is liable for such tax and is indemnified against claims and demands of any person for the amount of payments made in accordance with the provision.

No person may use information under the provision except for the purpose of meeting any requirements under the provision or for purposes permitted under section 6103. However, the identity of foreign financial institutions that have entered into an agreement with the Secretary is not treated as return information for purposes of section 6103.

The Secretary is expected to provide for the coordination of withholding under this provision with other withholding provisions of the Code, including providing for the proper crediting of amounts deducted and withheld under this provision against amounts required to be deducted and withheld under other provisions of the Code. The Secretary may provide further coordinating rules to prevent double withholding, including in situations involving tiered U.S. withholding agents.

The provision makes several conforming amendments to other provisions in the Code. The provision grants authority to the Secretary to prescribe regulations necessary and appropriate to carry out the purposes of the provision, and to prevent the avoidance of this provision.

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524- As defined in section 475(c)(2), without regard to the last sentence thereof.
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525- As defined in section 475(e)(2).
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526- Control for these purposes has the same meaning as control for purposes of section 954(d)(3).
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527- Subpart E of Part I of subchapter J of chapter 1.
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528- As defined in section 581.
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529- As defined in section 856.
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530- As defined in section 851.
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531- As defined in section 584(a).
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532- This includes charitable remainder annuity trusts and charitable remainder unitrusts.
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533- This includes certain charitable trusts not exempt under section 501(a).
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534- See, for example, the Commentaries on the OECD Model Tax Convention on Income and on Capital, which make clear that individual countries are free to establish procedures for providing any reduced tax rates agreed to by treaty partners. These procedures can include both relief at source and/or full withholding at domestic rates, followed by a refund. See, e.g., Commentary 26.2 to Article 1.

A number of Articles of the Convention limit the right of a State to tax income derived from its territory. As noted in paragraph 19 of the Commentary on Article 10 as concerns the taxation of dividends, the Convention does not settle procedural questions and each State is free to use the procedure provided in its domestic law in order to apply the limits provided by the Convention. A State can therefore automatically limit the tax that it levies in accordance with the relevant provisions of the Convention, subject to possible prior verification of treaty entitlement, or it can impose the tax provided for under its domestic law and subsequently refund the part of that tax that exceeds the amount that it can levy under the provisions of the Convention. Ibid. While Commentary 26.2 notes that a refund mechanism is not the preferred approach, the Act establishes such a mechanism for beneficial owners in certain circumstances. This approach serves to address, in part, observed difficulties in identifying U.S. persons who inappropriately seek treaty benefits to which they are not entitled.
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