DERIVATIVES & FINANCIAL INSTRUMENTS Volume 13 - Number 2 - 2011 Articles United States/International • Multi-Jurisdictional Reactions to the US HIRE Act Withholding International • The Brittle Reincarnation of VAT Saving Schemes Germany • Regulatory and Tax Aspects of Short Selling France • New Tax Rules:Highlights of 2011 Finance Bill, Fourth Amended Finance Bill for 2010 and 2011 Social Security Finance Bill Belgium • Cash Drain Transactions and Tax Deductibility of Certain Expenses Recent Developments Indonesia; Brazil; Australia; United States INTERNATIONAL TAXATION, REGULATION AND ACCOUNTING v Articles sAL,131 Multi-Jurisdictional Reactions to the US HIRE Act Withholding The US Hiring Incentives to Restore Employment as a substantial portion of its business, holds financial as- Act of 2010 made a number of changes to the US sets for the account of others; or is engaged (or holds withholding tax laws in an attempt to improve itself out as being engaged) primarily in the business of tax compliance with respect to foreign accounts investing, reinvesting or trading in securities,' partnership held by US persons and cross-border interests, commodities 6 or any interest (including a futures transactions. One of the most significant or forward contract or option) in such securities, part- changes was the introduction of a new nership interests or commodities. Thus, a financial insti- withholding tax that will apply to US-source tution would include a hedge fund, a private equity fund payments after 31 December 2012 unless the or other collective investment vehicle, as well as a bank. non-US recipient complies with certain US 30% withholding on payments to non-financial foreign entit- reporting and disclosure rules. Not surprisingly ies. Sec. 1472 imposes a 30% withholding tax on payments the shift in US withholding tax policy has to most non-financial non-US entities .' after 31 December created a variety of reactions among US treaty partners. This article focuses on some of those jurisdictions and describes the reactions there, * Wilem Bongaerts, Senior Attorney, Loyens & Loeff N.V., Eindhoven; as well as some issues relating to compliance Paul Carman, Partner, Chapman and Cutler LLP, Chicago; Albert Col- with the new US law. lado, Partner, Garrigues, Barcelona; Eric Fort, Partner, Arendt & Med- ernech, Luxembourg; Wilhelm Haarmann, Partner, Haarmann, Frank- furt; Jidesh Kumar, Managing Partner, King, Stubb & Kasiva, India; 1. Introduction Peter Maher, Partner, A&L Goodbody, Dublin; Raul-Angelo Papotti, Associate, Chiomenti Studio Legale, Milano; Alain Ranger, Senior On 18 March 2010, the US Hiring Incentives to Restore Partner, Fasken Martineau DuMoulin LLP, Mon treal and George Employment (HIRE) Act of 2010 made a number of Ribeiro, Partner, Ribeiro Hui, Hong Kong. changes to the US withholding tax laws in an attempt to 1. The new withholding provisions are generally referred to as FATCA pro- improve tax compliance with respect to foreign accounts visions, in reference to the Act that originally introduced the provisions held by US persons and cross-border transactions. One in the US Congress. 2. Original issue discount includes both the deemed accrual on debt instru- of the most significant changes was the introduction of a ments that are sold at a discount to face and the deemed accrual that new withholding tax that will apply to US-source pay- occurs with regard to debt instruments in respect of which all or a portion ments after 31 December 2012 unless the non-US recip- of the interest is contingent. 3. The IRS has taken the position that swap income is fixed and determinable ient complies with certain US reporting and disclosure income even though it may not be US-source income. TD 8734, 62 Fed. rules.' Reg. 53387 (14 October 1997). 4. Sec. 1473(1)(A) IRC. 5. In this context, "security" means any share of stock in a corporation, a 2. New Withholding Provisions partnership or beneficial ownership interest in a widely held or publicly traded partnership or trust; a note, bond, debenture or other evidence of 30% withholding on payments to foreign financial institu- indebtedness; an interest rate, currency or equity notional principal con- tions. Sec. 1471 of the Internal Revenue Code (IRC) im- tract; evidence or an interest in, or a derivative financial instrument in, poses a 30% withholding tax on withholdable payments any security described in the previous parts of this definition or any cur- rency, including any option, forward contract, short position and any sim- to non-US financial institutions after 31 December 2012, ilar financial position in such a security or currency or a position which in respect of obligations in existence on 18 March 2012, is a hedge with respect to a security and is clearly identified in the dealer's unless the non-US financial institution agreed to certain records as being a hedge under Sec. 475(c)(2)(F)(iii) of the IRC. 6. In this context, "commodity" means any commodity which is actively US reporting and disclosure rules. In general, a withhold- traded (within the meaning of Sec. 1092(d)(1) of the IRC); any notional able payment includes: principal contract with respect to any actively traded commodity; any ev- - any payment of interest (including original issue dis- idence of an interest in, or a derivative instrument in, any actively traded commodity or any notional principal contract with regard to an actively count2), dividends, rent, salaries, wages, premiums, traded commodity, including any option, forward contract, futures con- annuities, compensation, remuneration, emoluments tract, short position and any similar instrument in such a commodity; and other fixed or determinable annual or periodic and any position which is a hedge with respect to a commodity and is clearly identified in the taxpayer's records as being described in Sec. gains, profits and income' if such payment is from 475(e)(2)(D)(iii) of the IRC. sources within the United States; and 7. Excepted non-financial foreign entities include (1) any corporation the - any gross proceeds from the sale or other disposition stock of which is regularly traded on an established securities market, (2) any corporation which is a member of the same expanded affiliated group of any property of a type that can produce interest as a corporation the stock of which is regularly traded on an established or dividends from sources within the United States. 4 securities market, (3) any entity which is organized under the laws of a US territory and which is wholly owned by one or more bona fide residents A financial institution is any entity which accepts deposits (as defined in Sec. 937(a)) of such US territory, (4) any forcign government, in the ordinary course of a banking or similar business; any political subdivision of a foreign government or any wholly owned agency or instrumentality of any one or more of the foregoing, (5) any in- 36 I DERIVATIVES & FINANCIAL INSTRUMENTS MARCH/APRIL 2011 IBFD Multi-Jurisdictional Reactions to the US HIRE Act Withholding 2012, in respect of obligations in existence on 18 March would be required to apply 30% withholding tax on all 2012, unless the payee or the beneficial owner of the pay- US-source payments. ment either provides the withholding agent with a certi- As with financial institutions, non-financial institutions fication that the non-US entity does not have a substantial would need to obtain consent to disclose information un- US owner' or provides the withholding agent with the less required by Canadian law. Under the Proceeds of name, address and taxpayer identification number of each Crime Money Laundering and Terrorist Financing Act substantial US owner. and Regulations (PCMLTFA), financial institutions and Dividend-equivalent payments. In another change made securities dealers are required to collect certain prescribed by the HIRE Act, the United States will impose withhold- information regarding their customers, including infor- ing on dividend-equivalent payments that are deemed to mation regarding the beneficial owners of the customers. be from US sources. For these purposes, "dividend-equi- However, the information collected pursuant to valent payment" means (1) any substitute dividend pay- PCMLTFA is not entirely the same as the information re- ment made pursuant to a securities lending or a sale-re- quired by the IRS under the FATCA provisions. Further, purchase transaction that (directly or indirectly) is PCMLTFA and its regulations do not authorize the shar- contingent upon, or determined by reference to, the pay- ing of the information collected with the IRS. ment of a dividend from sources within the United States, Foreign non-business taxes paid generally qualify for a (2) any payment' made pursuant to a specified notional foreign tax credit to the extent that they do not exceed principal contract" that (directly or indirectly) is contin- the Canadian income tax otherwise payable on the non- gent upon, or determined by reference to, the payment business income. However, as further discussed below, if of a dividend from sources within the United States and an applicable tax treaty provides for a lower tax rate than (3) any other payment determined by the Treasury to be the rate imposed by the foreign jurisdiction, the lower similar. rate would apply for purposes of the foreign tax credit. A further limitation provides that any amount of tax paid 3. Multi-Jurisdictional Reactions to a foreign government in excess of the amount required Not surprisingly the shift in US withholding tax policy, to he paid under an applicable tax treaty may be consid- which will affect payments to jurisdictions with which ered a voluntary payment for Canadian foreign tax credit the United States has existing tax treaties, has created a and deduction purposes, and therefore would not qualify variety of reactions. This article focuses on some specific as foreign taxes paid. For example if the United States ap- jurisdictions and describes the reactions of those juris- plies a 30% withholding tax at source and then requires dictions, as well as some issues relating to compliance the taxpayer to claim a refund for the' excess withheld with the new US law.