Broad Changes to U.S. Withholding Rules Signed Into Law
By Robert E. Culbertson and Christopher Van Blarcum
On March 18, 2010, President Barack Obama signed into law H.R. 2847, the Hiring Incentives to Restore Employment Act (the HIRE Act). Among the provisions contained in the HIRE Act is a revenue offset imposing significant new withholding and reporting burdens on cross-border payment flows, in an effort to combat tax evasion by U.S. citizens through the use of foreign financial accounts. These withholding provisions are nearly identical to the provisions described in our earlier client alert, Broad Changes to U.S. Withholding Rules Pass the House (December 2009).
As discussed in greater detail in that alert, the net effect of the provisions will be to confront all non-U.S. banks and investment funds with having to choose among three broad options:
(i) Ensure their continued ability to receive U.S.-source payments free of 30 percent withholding by entering into an agreement with the IRS to take on greatly-expanded information-gathering and reporting obligations in respect of U.S. customers and legal entity customers with U.S. owners;
(ii) Ensure their continued ability to receive U.S.-source payments free of 30 percent withholding by declining to maintain any accounts for U.S. or U.S.-owned customers (under to-be-issued IRS rules); or
(iii) Accept the imposition of 30 percent withholding with respect to U.S.-source payments, subject to account holders ability to seek refunds of overwithheld amounts.