U.s. Investors: International Tax Issues 2010
Hiring Incentives to Restore Employment Act (H.R. 2847) (3/18/10)
Healthcare and Education Reconciliation Act of 2010 (H.R. 4872) (3/25/10)
On Thursday, March 18, 2010 President Obama signed the Hiring Incentives to Restore Employment Act (H.R. 2847). Included in the bills' provisions is the Foreign Account Tax Compliance Act.
1. Foreign Account Tax Compliance
The Foreign Account Tax Compliance Act (H.R. 2847), adds new tax reporting requirements for foreign entities with U.S. investors.
Foreign entities (i.e., closely held corporations, partnerships, trusts) must now provide U.S. Tax Withholding Agents (who report tax information to the U.S. Treasury Department) name, address, and tax identification number for U.S. Taxpayers with either:
a. Foreign accounts, or
b. Ownership (Foreign Entities) a greater than 10% ownership interest in a:
i. Foreign trust
ii. Partnership, or
iii.Corporation
c. Foreign entities who fail to report must withhold 30% tax (payable to the U.S. Treasury Department).
d. Public companies are exempt from this reporting requirement.
2. Medicare Tax
The Healthcare and Education Reconciliation Act of 2010 (H.R. 4872) imposes a new tax on individuals equal to 3.8% of the lesser of:
a. Individual's net investment income for the year, or
b. The amount the individual's modified adjusted gross income exceeds the threshold amount ($200,000 for individuals, $250,000 for married filing jointly, $125,000 for married, filing separately).
For trusts and estates, the tax equals 3.8% of the lesser of:
a. Undistributed net investment income, or
b. Adjusted gross income over the dollar amount of the highest trust and estate tax rates (i.e., 2010: $11,200).
Net investment income (defined): interest, dividends, annuities, royalties and rents, other than income derived in the ordinary course of a trade or business (includes income from passive activities).
3. Economic Substance Doctrine
The Economic Substance Doctrine was created by the courts to determine whether a transaction was meaningful (i.e., had Economic Substance independent of the tax benefits).
Different courts have applied different tests for Economic Substance.
Under the Reconciliation Act, the Economic Substance Doctrine (new IRC Section 7701(o)) codified a two-part test:
a. A transaction will have Economic Substance only if the transaction changes the Taxpayer's position in a meaningful way (independent of any tax benefits).
b. The Taxpayer has a substantial purpose for entering into the transaction (independent of the tax benefits).
Under the Reconciliation Act, a failure to meet the Economic Substance test:
a. Subjects the transaction to penalty under IRC Section 6662,
b. Imposes an increased penalty amount for nondisclosed transactions (that lack Economic Substance), and
c. Transactions that lack Economic Substance no longer qualify for the reasonable cause exception (IRC Section 6664).
Healthcare and Education Reconciliation Act of 2010 (H.R. 4872) (3/25/10)
On Thursday, March 18, 2010 President Obama signed the Hiring Incentives to Restore Employment Act (H.R. 2847). Included in the bills' provisions is the Foreign Account Tax Compliance Act.
1. Foreign Account Tax Compliance
The Foreign Account Tax Compliance Act (H.R. 2847), adds new tax reporting requirements for foreign entities with U.S. investors.
Foreign entities (i.e., closely held corporations, partnerships, trusts) must now provide U.S. Tax Withholding Agents (who report tax information to the U.S. Treasury Department) name, address, and tax identification number for U.S. Taxpayers with either:
a. Foreign accounts, or
b. Ownership (Foreign Entities) a greater than 10% ownership interest in a:
i. Foreign trust
ii. Partnership, or
iii.Corporation
c. Foreign entities who fail to report must withhold 30% tax (payable to the U.S. Treasury Department).
d. Public companies are exempt from this reporting requirement.
2. Medicare Tax
The Healthcare and Education Reconciliation Act of 2010 (H.R. 4872) imposes a new tax on individuals equal to 3.8% of the lesser of:
a. Individual's net investment income for the year, or
b. The amount the individual's modified adjusted gross income exceeds the threshold amount ($200,000 for individuals, $250,000 for married filing jointly, $125,000 for married, filing separately).
For trusts and estates, the tax equals 3.8% of the lesser of:
a. Undistributed net investment income, or
b. Adjusted gross income over the dollar amount of the highest trust and estate tax rates (i.e., 2010: $11,200).
Net investment income (defined): interest, dividends, annuities, royalties and rents, other than income derived in the ordinary course of a trade or business (includes income from passive activities).
3. Economic Substance Doctrine
The Economic Substance Doctrine was created by the courts to determine whether a transaction was meaningful (i.e., had Economic Substance independent of the tax benefits).
Different courts have applied different tests for Economic Substance.
Under the Reconciliation Act, the Economic Substance Doctrine (new IRC Section 7701(o)) codified a two-part test:
a. A transaction will have Economic Substance only if the transaction changes the Taxpayer's position in a meaningful way (independent of any tax benefits).
b. The Taxpayer has a substantial purpose for entering into the transaction (independent of the tax benefits).
Under the Reconciliation Act, a failure to meet the Economic Substance test:
a. Subjects the transaction to penalty under IRC Section 6662,
b. Imposes an increased penalty amount for nondisclosed transactions (that lack Economic Substance), and
c. Transactions that lack Economic Substance no longer qualify for the reasonable cause exception (IRC Section 6664).
