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"Tax Compliance and Enforcement Issues with Respect to Offshore Accounts and Entities" (PDF)

The Subcommittee on Select Revenue of the House Committee on Ways and Means recently scheduled a public hearing on issues relating to banking secrecy practices and wealthy American taxpayers. The staff of the Joint Committee on Taxation prepared the document, "Tax Compliance and Enforcement Issues with Respect to Offshore Accounts and Entities" provides background on withholding and information reporting requirements applicable to payments of U.S. source portfolio investment income to nonresidents, the Internal Revenue Service (“IRS”) Qualified Intermediary program, the effect of bank secrecy laws and practices on U.S tax compliance and enforcement efforts involving offshore accounts, and information exchange procedures under U.S. income tax treaties and tax information exchange agreements.

Under present law, nonresidents who receive payments of U.S. source investment income are generally subject to U.S. withholding tax imposed at a 30 percent rate. This withholding tax serves as the only mechanism for collection of tax in the case of payments made to foreign persons who are not otherwise required to file a U.S. income tax return. There are, however, a number of significant statutory exemptions from the 30-percent withholding tax (including for interest paid on bank deposits, portfolio interest and most capital gains), and income tax treaties typically provide additional withholding tax relief.

Payments of U.S. source “fixed and determinable annual or periodic” income, including interest, dividends, and similar types of investment income, that are made to foreign persons are subject to U.S. withholding tax at a 30 percent rate, unless the withholding agent can establish that the beneficial owner of the amount is eligible for an exemption from withholding or a reduced rate of withholding under an income tax treaty.

The principal statutory exemptions from the 30-percent nonresident withholding tax apply to interest on bank deposits, portfolio interest and capital gains. Since 1984 the United States has imposed no tax on “portfolio interest” received by a nonresident individual or foreign corporation from sources within the United States. Portfolio interest includes generally any interest (including original issue discount) other than interest received by a 10-percent shareholder, certain contingent interest, interest received by a controlled foreign corporation from a related person, and interest received by a bank on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business.

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