Tax Alert: U.S. Senator Levin Unveils New Stop Tax Haven Abuse Act

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Information about Tax Alert: U.S. Senator Levin Unveils New Stop Tax Haven Abuse Act

Published on July 20, 2011

Author: pattonboggs



July 20, 2011 U.S. Senator Levin Unveils New Stop Tax Haven Abuse ActTax Client AlertThis Alert provides only general On July 12, 2011, Senator Carl Levin (D-MI) introduced the Stop Tax Haven Abuse Act (S.information and should not be 1346) (Senate Bill). This is the fifth Congress in which Senator Levin has introduced a comprehensive bill to combat perceived offshore and tax shelter abuses. Representative Lloydrelied upon as legal advice. Doggett (D-TX), joined by multiple co-sponsors, has introduced House companion bills in theThis alert may be considered past and will likely do so again. President Obama, while a member of the Senate, co-sponsoredattorney advertising under court Senator Levin’s bills in 2005 and 2007.and bar rules in certain Several similar bills were introduced by Senator Levin in the two previous Congresses. Broadlyjurisdictions. For more in line with those proposals, the Senate Bill would:information, contact theauthors listed below. • allow Treasury to take specific steps against foreign jurisdictions or financial institutions that impede U.S. tax enforcement; • treat any foreign corporation that is directly or indirectly “managed and controlled” fromDonald V. Moorehead within the United States and has at least $50 million in gross assets as a U.S.202.457.5212 corporation (taxable on its worldwide income) for U.S. federal tax purposes; • require a U.S. financial institution that opens an account for a foreign entity or non- FATCA institution to report the account to the U.S. Internal Revenue Service (IRS) ifGeorge J. Schutzer the entity has a U.S. beneficial owner or the institution is acting on behalf of, or for the202.457.5273 benefit of, a U.S. person; • increase tax shelter penalties;Aubrey A. Rothrock • establish a series of anti-money laundering and disclosure requirements for offshore202.457.5620 accounts and entities; • prohibit fee arrangements that are based on a projected or actual amount of tax savings or benefits;Emanuel M. Rossman • permit sharing of information upon the request of a federal financial regulator; • increase disclosure of tax shelter information to Congress; and • direct the establishment of standards for tax opinions with the potential for taxRosemary Becchi avoidance or In one significant change, the Senate Bill drops the notion of a Treasury-created list of jurisdictions that would be considered tax havens for purposes of enforcement. The Senate BillRichard Andersen also contains four important provisions that were not included in prior • expanding the application of the Foreign Account Tax Compliance Act (FATCA) andMicah S. Green creating rebuttable presumptions pertaining to entities and transactions involving non-202.457.5258 FATCA institutions; • determining the source of credit default swap payments by reference to the location of the payor;Lindsay M. Fainé • treating deposits made by a controlled foreign corporation (CFC) to a financial located in the United States, including a correspondent account of a foreign bank, as a taxable constructive distribution by the CFC to its U.S. parent; andErin L. McGrain • requiring annual country-by-country reporting on employees, sales, financing, tax202.457.5344 obligations, and tax payments by all corporations registered with the Securities Exchange Commission (SEC).Joseph

Analysis A. Expansion of the Foreign Account Tax Compliance Act FATCA was enacted as part of the Hiring Incentives to Restore Employment Act on March 18, 2010. In general, FATCA imposes a 30 percent withholding tax on any withholdable payment made to a foreign financial institution that fails to enter into an agreement with the Secretary of the Treasury (the Secretary), under which it agrees to undertake certain due diligence, reporting and withholding responsibilities. The term “financial institution” is currently defined as any entity that accepts deposits in the ordinary course of a banking or similar business, holds financial assets for the account of others as a substantial portion of its business or is engaged primarily in the business of investing, reinvesting or trading in securities, partnership interests, commodities or any interest therein. Treasury and the IRS have issued preliminary guidance pertaining to the new U.S. withholding and information reporting requirements on three separate occasions. On July 14, 2011, Treasury and the IRS provided a timeline for foreign financial institutions and withholding agents to implement the various requirements of FATCA. Although the extent of FATCA’s application is unclear in its current form, the Senate Bill would expand the definition of “financial account” by including derivative transactions. In addition, the Senate Bill would limit the Secretary’s authority to exclude certain classes of beneficial owners from the withholding requirements to those classes that pose a low risk of tax evasion. The Senate Bill also would permit disclosure of participating foreign financial institutions to any federal law enforcement agency, upon request or upon the initiation of the Secretary, to investigate or address a possible violation of U.S. law. Similar to the 2009 bill, the Senate Bill establishes certain presumptions for entities and transactions involving non-FATCA institutions. The Senate Bill provides that for purposes of any U.S. civil judicial or administrative proceeding to determine or collect tax, it will be presumed (absent clear and convincing evidence) that: (i) a U.S. person (other than a publicly traded entity) that (A) forms, transfers assets to, is a beneficiary of, has a beneficial interest in, or receives money or property or the use thereof from an entity (other than a publicly traded entity), (B) holds an account, or (C) in any other manner has assets in a non-FATCA institution, exercises control over such entity; (ii) any amount received by a U.S. person from such an entity is income in the year received; and (iii) any amount transferred by a U.S. person to such an entity represents previously unreported income taxable in the year of transfer. B. Source of Credit Default Swap Payments Under current law, income attributable to certain types of credit default swaps may be sourced to the recipients residence. For those credit default swaps, payments made to a non-U.S. person generally are not taxable in the United States; for others, the source of such payments is unclear. Under the Senate Bill, all credit default swap payments made by U.S. persons to non-U.S. persons would be sourced by reference to the location of the payor, subjecting such payments to a 30 percent withholding tax.WWW.PATTONBOGGS.COM The provision applies to transactions entered into after the Senate Bill is enacted. C. Constructive Distributions by CFCs to U.S. Shareholders Under current law, a significant U.S. shareholder of a CFC (generally, a U.S. owner of at least ten percent of the CFC’s voting stock) generally is taxable on its pro rata share of the increase in the CFC’s earnings invested in U.S. property for the taxable year. The term “U.S. property” does not include deposits with persons carrying on a banking business. Thus, a CFC generally may maintain bank deposits in the United States without subjecting its significant U.S. shareholders to current taxation in the United States.

The Senate Bill provides that any property of a CFC that is deposited and maintained, directlyor indirectly, in a financial account located in the United States, including in a correspondentaccount of a financial institution, will be treated as distributed (and therefore taxable) to theCFC’s significant U.S. shareholders.The provision applies to significant U.S. shareholders immediately after the Senate Bill isenacted. D. Country-by-Country ReportingThe Senate Bill contemplates regulations that would require each issuer (generally, a companythat is required to file reports with the SEC or that has filed, and not withdrawn, a registrationstatement with the SEC) to include in an annual report filed by the issuer with the SECinformation indicative of financial performance on a country-by-country basis during the coveredperiod, including (i) a list of each country of operation; (ii) the worldwide allocation of groupmembers; (iii) the financial performance of each member of the issuer group in each country ofoperation, including total employees, sales, purchases, financing payments, pre-tax grossrevenues, pre-tax net revenues and such other information determined indicative of thefinancial performance of the issuer; (iv) the tax paid by each member of the issuer group ineach country of operation, including total worldwide tax of each member of the issuer groupwith respect to each country of operation and total amount of tax paid after taking into accountapplicable deductions, tax credits, tax forgiveness or other tax benefits or waivers; and (v) suchother financial information determined necessary or appropriate in the public interest or for theprotection of investors.The provision requires that the SEC shall issue a proposed rule to carry out this section within180 days after the date of enactment with a final rule not later than 270 days after the date ofthe enactment of the Senate Bill.ConclusionSenator Levins proposed legislation is unlikely to gain traction in the near term. Even thoughSenator Conrad, an influential member inside the debt ceiling negotiations, co-sponsored thebill, the contentious nature and political importance of raising the debt ceiling will likelyovershadow the push for passage of this proposed legislation. Senator Conrad is also amember of the Committee on Finance, which has jurisdiction over the Senate Bill and, to date,there has been no indication from the Committee as to hearings, markups or other action onthe legislation.This Alert provides only general information and should not be relied upon as legal advice.This alert may also be considered attorney advertising under court and bar rules in certainjurisdictions.WASHINGTON DC | NORTHERN VIRGINIA | NEW JERSEY | NEW YORK | DALLAS | DENVER | ANCHORAGE DOHA, QATAR | ABU DHABI, UAE

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