International Tax Provisions Introduced and to Be Considered This Year

President Obama’s budget proposal for the 2010 fiscal year includes “certain international tax reform and enforcement measures,” but the only detail on this is the following one-line item from the associated revenue table: “implement international enforcement, reform deferral, and other tax reform policies.” This is estimated to raise $210 billion in 2010–2019, one of the largest budget proposal revenue raisers in the area of taxation.

The Treasury Department’s Office of Tax Policy has not yet released an outline or description of the tax provisions in the proposed budget, but is expected to do so by early April, so hopefully we will see further details soon.

Stop Tax Haven Abuse Act

Additionally, S 506 and HR 1265, the Stop Tax Haven Abuse Act of 2009, was introduced by Sen. Carl Levin, D-Mich., and Rep. Lloyd Doggett, D-Texas, to curtail alleged abuses of the tax system by individuals and corporations. The Obama administration has expressed support for it, as Obama was a cosponsor of similar legislation last year in the Senate. Therefore, all or parts of this bill may move forward this year, so taxpayers who could be affected should look at it. If this act passes, it will have a dramatic impact on U.S. persons who have any investments or businesses outside the U.S., as the bill was designed to eliminate the privacy afforded by doing business or investing outside the U.S. and to eliminate or reduce tax benefits available offshore.

On the positive side, the bill includes a provision that would ban tax strategy patents, similar to S 2369 from last year, a position that the AICPA has supported. The AICPA International Tax Technical Resource Panel is monitoring and analyzing the international tax provisions in this bill and in the budget proposals, so if you have any comments or would like to assist with drafting comments, e-mail esherr@aicpa.org.

Among other measures, S 506/HR 1265 would:

• Establish presumptions to combat offshore secrecy (§ 101) by allowing U.S. tax and securities law enforcement to treat for tax purposes nonpublicly traded offshore entities as being controlled by the U.S. taxpayer who formed them, sent them assets, received assets from them, or benefited from them, unless the taxpayer proves otherwise.
• Impose tougher requirements on U.S. taxpayers using offshore secrecy jurisdictions (§ 101) by authorizing the Treasury Department to develop a list of jurisdictions starting from an initial 34 jurisdictions identified in IRS court proceedings.
• Authorize special measures to stop offshore tax abuses (§ 102) by giving the Treasury Department authority to take special measures against foreign jurisdictions and financial institutions that impede U.S. tax enforcement.
• Cure the “Ugland House” problem of shell companies run from the U.S. claiming foreign status (§ 103) by treating foreign corporations that are publicly traded or have gross assets of $50 million or more and whose management and control occurs primarily in the United States as U.S. domestic corporations for income tax purposes.
• Strengthen detection of offshore activities (§ 105) by requiring U.S. financial institutions that open accounts for foreign entities controlled by U.S. clients, open accounts in offshore secrecy jurisdictions for U.S. clients, or establish entities in offshore secrecy jurisdictions for U.S. clients to report such actions to the IRS.
• Close offshore trust loopholes (§ 106) by taxing distributions, gifts, and loans from foreign trusts of real estate, artwork, or jewelry to U.S. persons, and treating U.S. persons who receive offshore trust assets as trust beneficiaries.
• Close the offshore tax dividend loophole (§ 108) by treating all U.S. corporate dividend-based payments to non-U.S. persons as taxable income subject to withholding.
• Expand IRS reporting requirements (§ 109) for passive foreign investment companies (PFICs) to include not only U.S. persons who own a PFIC but also those who have formed, sent assets to, received assets from, or benefitted from a PFIC.
• Require anti-money laundering programs (§ 203) for hedge funds and company formation agents to ensure they screen their clients and any offshore funds.
• Strengthen penalties (§§ 301 and 302) on tax shelter promoters by increasing the maximum fine to 150% of their ill-gotten gains, and on corporate insiders (§ 201) who hide offshore stock holdings by increasing the maximum fine to $1 million per violation of U.S. securities laws.
• Ban tax shelter patents (§ 303) by prohibiting the U.S. Patent Office from issuing patents for “inventions” designed to minimize, avoid, or defer taxes.

Eileen Reichenberg Sherr, CPA, M. Tax, is a technical manager with the AICPA in Washington, D.C. Her e-mail address is esherr@aicpa.org.