In the current climate of international tax information exchange, offshore accounts disclosure and relaxation of banking secrecy laws, the US Government has stepped up its clampdown on US tax avoidance by targeting US citizens with accounts in foreign financial institutions under the new Hiring Incentives to Restore Employment Act 2010 (‘HIRE’).
Let’s start from the basics. When a foreign (i.e. non-US) person receives certain types of US source income, the payer, or withholding agent, is obliged to deduct 30% tax from that income. Reduced rates may be available under an applicable double tax treaty. Income potentially subject to this withholding tax includes dividends, interest, royalties and gross proceeds from sales of securities.
However, if the payee is a foreign financial institution in a country with IRS-approved Know Your Client (KYC) procedures, the institution may apply for Qualified Intermediary (QI) status. The institution does so by entering into a 6-year QI Withholding Agreement with the IRS – a 60-page document with complex documentary requirements, including compulsory external audits for years 2 and 5. The QI regime is considered burdensome for financial institutions, but its key advantage is to maintain confidentiality for the institution’s non-US clients. If an institution chooses not to become a QI, it must either disclose all client details to the IRS or be charged 30% withholding. (Further details on QI Agreements can be found at Revenue Procedure 2000-12).
The US Government must have cottoned on to the fact that QI regime has effectively permitted US account holders to ‘hide’ behind a QI by investing their income in US stocks and securities through a foreign intermediary exempt from withholding tax. HIRE addresses this issue (amongst others) by requiring all foreign financial institutions to provide substantial information to the IRS regarding their US account holders, or be charged 30% withholding. The QI and HIRE regimes will operate in conjunction with each other to promote rigorous KYC-type disclosure of both US and non-US accounts to the IRS.
The new HIRE rules will apply to payments made after 31 December 2012. For further details see: