[Congressional Record (Bound Edition), Volume 156 (2010), Part 3]
[Senate]
[Pages 3806-3808]
[From the U.S. 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.

[[Page 3807]]

  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.
  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

[[Page 3808]]

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 ``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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