[Congressional Record Volume 156, Number 40 (Thursday, March 18, 2010)]
[Senate]
[Pages S1745-S1747]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
HIRE ACT
Mr. LEVIN. Mr. President, today President Obama signed into law the
Hiring Incentives to Restore Employment Act, H.R. 2847, which will help
put Americans back to work. More must be done on to help fight the
unacceptably high unemployment rate, and I hope we can soon address
other factors holding back our recovery, and particularly that we make
it easier for businesses to obtain the funds they need to survive and
grow.
While we work in Congress to get people back to work, I also want to
take a moment to focus on another benefit of today's new law.
The HIRE Act is a significant victory for law-abiding U.S. taxpayers,
and a significant blow against those who dodge their responsibilities.
The Permanent Subcommittee on Investigations, which I chair, has spent
years investigating offshore tax abuses which together cost the federal
treasury an estimated $100 billion in lost tax revenues annually. In
addition to its provisions designed to help foster economic growth, the
HIRE Act contains foreign account tax compliance provisions that
represent a major new and positive development in the efforts to stop
offshore banks from using secrecy laws to help U.S. taxpayers evade
their taxes.
These offshore tax compliance provisions are the culmination of over
a year's worth of study, debate, and drafting efforts to protect
America's honest taxpayers. The drafting effort involved a host of
Members of Congress from both the Senate Finance Committee and the
House Ways and Means Committee, and the work drew upon multiple bills,
including the Stop Tax Haven Abuse Act, S. 506, which I introduced with
Senators McCaskill, Nelson, Whitehouse, Shaheen, and Sanders, and which
Congressman Lloyd Doggett introduced in the House with 67 cosponsors. I
would like to commend Senator Baucus and Congressman Rangel, in
particular, for leading this drafting effort, and for involving us in
producing a strong bill that President Obama is signing into law today.
This is a big bill, and its offshore tax provisions are complex. I
want to provide some explanation of how this legislation is intended to
work, both to guide the development of implementing regulations and to
inform the courts of our legislative intent.
Section 501, ``Reporting on Certain Foreign Accounts,'' gives foreign
financial institutions a choice. If those financial institutions hold
U.S. investments of any variety--from U.S. treasuries to U.S. stocks
and bonds to debt and equity interests in U.S. businesses--they must
either pay a 30 percent withholding tax on their investment earnings,
or disclose any and all accounts held by U.S. persons. The legislative
intent behind this choice is to force foreign financial institutions to
disclose their U.S. accountholders or pay a steep penalty for
nondisclosure. The 30 percent will be withheld by a withholding agent
in the United States before the funds are permitted to exit the U.S.
financial system.
The reason for this strong approach was seen dramatically in hearings
before the Permanent Subcommittee on Investigations. A July 2008
hearing, for example, showed how two foreign banks, UBS AG of
Switzerland and LGT Bank of Liechtenstein, used a variety of secrecy
tricks to help U.S. clients open foreign bank accounts and hide
millions of dollars in assets from U.S. tax authorities. One 2004 UBS
document indicated that 52,000 U.S. clients had Swiss accounts that had
not been disclosed to the IRS. UBS estimated that those hidden accounts
contained a total of about $18 billion in cash, securities, and other
assets. In order to defer a criminal prosecution against the bank by
the U.S. Department of Justice, UBS admitted that it had participated
in a scheme to defraud the United States of tax revenues, paid a $750
million fine, and agreed to stop opening accounts that are not
disclosed to the IRS. UBS also agreed to reveal the names of a limited
number of U.S. accountholders, although the bulk of the 52,000 still
may escape U.S. tax enforcement actions due to Swiss secrecy laws that
continue to conceal their identities.
In order to avoid the 30 percent withholding tax, this new law will
require each foreign financial institution to enter into an agreement
with the Secretary of the Treasury to obtain and verify information
which will make it possible for them to determine which of their
accounts belong to U.S. account holders, report key information about
those U.S. account holders, and comply with any request by the Treasury
Secretary related to those U.S. accounts. The bill is written to end
wide spread abuses. There are several issues that must be addressed in
implementing this provision.
For instance, it is clearly intended that the definition of foreign
``financial institution'' be applied broadly, to include banks,
securities firms, money services businesses, money exchange houses,
hedge funds, private equity funds, commodity traders, derivative
dealers, and any other type of financial firm that holds, invests, or
trades assets on behalf of itself or another person.
The definition of ``account'' will cover not only traditional
savings, checking, and securities accounts, but also debt and equity
interests in hedge funds, private equity funds, and other types of
investment firms.
The definition of ``U.S. person'' will apply to U.S. citizens, U.S.
residents, and all types of U.S. businesses.
The purpose of the provision is to have foreign financial
institutions look past the nominal owners of their accounts to identify
the true beneficial owners. That means accounts which are held in the
name of a foreign legal representative, agent, or trustee on behalf of
a U.S. person, or in the name of a foreign entity, such as an offshore
corporation, partnership, or trust, for the benefit of a U.S. person,
must be disclosed to U.S. authorities.
Foreign financial institutions are to make use of all customer
identification information about each account to determine whether the
beneficial owners of the account are U.S. persons--including using all
information gathered as a result of antimoney laundering and
anticorruption requirements or efforts. So no foreign bank will be able
to automatically determine that all foreign offshore shell corporations
are foreign accountholders; they will have to look deeper to identify
that corporation's beneficial owners and, if any beneficial owner is a
U.S. person, to report that person's identity to the United States.
This approach is intended to remedy past IRS regulations which have
allowed banks to treat all foreign corporations as foreign
accountholders, no matter who the beneficial owner is. Our purpose here
is to impose on foreign financial institutions the duty to identify the
beneficial owners of each corporation and report any U.S. beneficial
owners to the IRS.
Treasury, in implementing this statute, should develop a standard
agreement for foreign financial institutions that lays out these
requirements with respect to accounts, U.S. persons, and nominee
accountholders. That standard agreement must also be constructed in
such a way that foreign financial institutions will provide account
information in a standardized electronic format that will enable
efficient analysis of the data. Treasury should consult with the IRS
and the Justice Department's Tax Division to determine how the
collected information should be structured to provide timely and usable
data in tax enforcement efforts.
The Treasury will need to construct a withholding regime that will
efficiently withhold the 30 percent tax on all U.S. investment earnings
held by a noncooperative foreign financial institution. This statute
will not be effective unless the 30 percent tax is withheld promptly,
reliably, and in a comprehensive way. In devising this withholding
regime, it is our purpose to apply the term ``withholdable payment''
broadly to cover all types of payments from sources in the United
States, including interest payments, dividends, rents, wages, stock
gains, and derivative payments originating in the United States.
Finally, we expect that the Treasury, when exercising authority under
the bill to grant exceptions or waivers or deem foreign financial
institutions to be in compliance with the law, will exercise that
authority narrowly and in a fashion that is consistent with the
purposes of the statute and will promote disclosure of foreign accounts
with U.S. account holders.
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Sections 511 through 521 of the HIRE Act establish stronger
disclosure requirements for U.S. taxpayers with foreign financial
assets. Section 511 will require full disclosure of assets held outside
of the United States, in order to end years of abuses involving the
concealment of offshore assets, including disclosure, for example, of
interests in foreign accounts, securities, complex financial
instruments, debt or equity interests in foreign hedge funds, private
equity funds, or other investment vehicles, and derivative contracts
and trading arrangements. A new requirement in Section 521 for annual
reports filed by shareholders of passive foreign investment companies
will provide additional important disclosures of assets held outside of
the United States. Tough penalties and a longer statute of limitations
will add to the effectiveness of these new disclosure requirements.
Sections 531 through 535 tighten U.S. tax rules for foreign trusts
and address a variety of abuses identified in my Permanent Subcommittee
in Investigations 2006 hearings exposing how U.S. taxpayers use foreign
trusts to evade their U.S. tax obligations. Section 531 ends
shenanigans involving U.S. persons who are not officially beneficiaries
of a foreign trust, but could be named a beneficiary by the trustee, or
who write ``Letters of Intent'' instructing the trustee how to use or
distribute trust assets. Section 532 creates a ``Presumption that
Foreign Trust Has United States Beneficiary'' if a U.S. person directly
or indirectly transfers property to that foreign trust. The presumption
is rebuttable, but the onus is placed on the proper party, the person
who has access to the information about the foreign trust, to rebut the
presumption. Section 533 will stop abuses in which U.S. persons
instruct foreign trusts to purchase and lend them property on an
uncompensated basis, including jewelry, artwork, and even luxury homes.
Section 534 requires U.S. grantors as well as trustees to ensure that
trust transactions are properly reported to the IRS. These provisions
will help put an end to foreign trust tax abuses that significantly
undermine the U.S. Government's ability to collect taxes owed by
foreign trusts with U.S. beneficiaries.
Still another section of the bill makes important changes to curb
offshore tax abuses involving nonpayment of U.S. taxes on U.S. stock
dividends. Section 541 is a direct result of a year-long inquiry by my
Permanent Subcommittee on Investigations into this problem. In
September 2008, the subcommittee held a hearing and released a report
detailing how offshore entities routinely dodge taxes on U.S. stock
dividends--S. Hrg. 110-778. As discussed at the hearing, over the last
ten years, dividend tax abuse has cost the U.S. treasury and honest
taxpayers billions of dollars in lost revenue. The report made four
recommendations:
First, end offshore dividend tax abuse. Congress should end offshore
dividend tax abuse by enacting legislation to make it clear that non-
U.S. persons cannot avoid U.S. dividend taxes by using a swap or stock
loan to disguise dividend payments. Section 541 is designed to address
this problem by eliminating the different tax rules for U.S. stock
dividends, dividend equivalent payments, and substitute dividend
payments, and making them all equally taxable as dividends.
Second, take enforcement action. The IRS should complete its review
of dividend-related transactions and take civil enforcement action
against taxpayers and U.S. financial institutions that knowingly
participated in abusive transactions aimed at dodging U.S. taxes on
stock dividends. The IRS has recently designated ending dividend tax
dodging as a Tier I enforcement issue, and section 541 will provide the
IRS with new tools in that enforcement effort. Section 541 requires
exactly that.
Third, strengthen regulation on equity swaps. To stop misuse of
equity swap transactions to dodge U.S. dividend taxes, the IRS should
issue a new regulation to make dividend equivalent payments under
equity swap transactions taxable to the same extent as U.S. stock
dividends.
Fourth, strengthen stock loan regulation. To stop misuse of stock
loan transactions to dodge U.S. dividend taxes, we recommended that the
IRS immediately meet its 1997 commitment to issue a new regulation on
the tax treatment of substitute dividend payments between foreign
parties to make clear that inserting an offshore entity into a stock
loan transaction does not eliminate U.S. tax withholding obligations.
After waiting over 18 months for Treasury and the IRS to act, section
541 now provides them with a clear legislative mandate to issue
stronger regulation of swaps and stock loans.
Section 541 makes a number of key changes in the law. First, section
541 calls for ``dividend equivalents'' to be treated as a U.S. sourced
dividend and therefore subject to withholding tax beginning 180 days
from enactment. ``Dividend equivalent'' is defined to include ``any
substitute dividend made pursuant to a securities lending or a sale-
repurchase agreement that (directly or indirectly) is contingent upon,
or determined by reference to, the payment of a dividend from sources
within the United States.'' Once this becomes effective, all payments
made based on, or by reference to, a dividend from a U.S. source under
a securities lending or sale-repurchase transaction will be treated as
a dividend from a U.S. source.
Treating dividend equivalents as U.S. sourced income sets an
important precedent. Before this provision was enacted into law, the
source of a dividend equivalent payment--often carried out through a
swap arrangement--was determined according to who received the payment.
But it makes no sense and turns the English language on its head to say
the recipient of a payment is the ``source'' of that payment. The
source of a payment will to be determined according to the person who
initiated the payment, not according to its recipient, and section 541
makes that clear.
``Dividend equivalent'' is also defined to include ``any payment made
pursuant to a specified notional principal contract that (directly or
indirectly) is contingent upon, or determined by reference to, the
payment of a dividend from sources within the United States.''
``Specified notional principal contract'' is defined differently
depending upon whether the payment is made before or after 2 years from
the Act's enactment. For the first year-and-a-half after the act's
effective date, payments made pursuant to notional principal contracts
that are made based on, or by reference to, a dividend from a U.S.
source are treated as a dividend from a U.S. source if they meet any of
the criteria specified in newly enacted 26 U.S.C. 871(l)(3)(A)(i)-(iv)
or ``such contract identified by the Secretary.'' The four specific
criteria define the worst of the abusive notional principal contracts
that the subcommittee uncovered.
However, as established in the subcommittee report and hearing on
this matter, many financial institutions have moved away from the
blatantly abusive practices that are addressed in subsections
(3)(A)(i)-(iv) and now use more subtle methods of ensuring a riskless
transfer between holding U.S. securities and engaging in notional
principal contracts. It is the legislative intent of the authors of
this provision that the Secretary will use the authority granted in
(3)(A)(v) to identify and extend coverage of this statue to stop the
more subtle abusive practices as well, and I encourage Treasury to act
quickly to do so.
Two years from the date of enactment, any payment made pursuant to a
notional principal contract that is based on, or by reference to, a
dividend from a U.S. source is treated as a dividend from a U.S.
source, ``unless the Secretary determines that such a contract is of a
type which does not have the potential for tax avoidance.'' Again, it
is the intent of this language that the Secretary uses this exception
authority very sparingly, that only narrow types of contracts be
excepted, and that such exceptions be fashioned only after conducting a
thorough analysis to ensure that the contracts under consideration
cannot be exploited for tax avoidance. As the language states, an
exception is available only after the Secretary determines that the
type of contract is not being used for tax avoidance, and does not have
the potential for tax avoidance. That is intentionally a very high
standard.
In addition to substitute dividends and payments made pursuant to
notional principal contracts, ``dividend equivalent'' is also defined
to include
[[Page S1747]]
``any other payment determined by the Secretary to be substantially
similar'' to substitute dividends and payments made pursuant to
notional principal contracts. Treasury is intended to utilize this
explicit legislative directive to aggressively enforce dividend tax
collection on substantially similar payments and transactions. For
example, as explained in the Joint Committee on Taxation's ``Technical
Explanation of the Revenue Provisions Contained in Senate Amendment
3310, the `Hiring Incentives to Restore Employment Act,' Under
Consideration by the Senate'' (JCX-4-10), ``the Secretary may conclude
that payments under certain forward contracts or other financial
contracts that reference stock of U.S. corporations are dividend
equivalents.'' The point of the ``substantially similar'' language is
to provide Treasury and the IRS with broad authority and the
flexibility needed to prevent misuse of other financial instruments or
trading activities to evade U.S. dividend taxes.
Finally, section 541 contains an important provision on the
``prevention of over-withholding.'' As the language states, the
Secretary may reduce the tax on dividends only ``to the extent that the
taxpayer can establish that such tax has been paid with respect to
another dividend equivalent in such chain, or is not otherwise due, or
as the Secretary determines is appropriate to address the role of
financial intermediaries in such chain.'' The burden of proof placed on
the taxpayer is intentionally high due to the numerous abuses that have
occurred over the years in which taxpayers have designed elaborate
chains of transactions to escape all taxation of U.S. stock dividends.
This provision provides an equitable way to address the potential
problem of over-withholding, while setting an intentionally high burden
of proof to avoid abusive over-withholding claims.
I appreciate the attention that the Senate Finance and House Ways and
Means Committees gave to the tax dodging problems identified in the
Subcommittee's investigation. We also appreciate the technical guidance
and cooperation provided by the Treasury Department, Internal Revenue
Service, and the Joint Committee on Taxation in this Section.
I hope these remarks help shine a light on how this piece of
legislation will begin to curb the $100 billion in offshore tax abuses
now robbing honest taxpayers of needed government resources each year.
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