Friday, April 15, 2016

US Pressured For Beneficial Ownership Rules

We previously posted, Get Ready For The USProposed Plan to Require Banks to Identify Owners of Shell Companies! where we discussed that the United States government is close to issuing a rule that will for the first time require banks and other financial institutions to find out the identities of people hidden behind shell companies.

The rule is meant to close a major loophole in the American banking system that enables the sorts of secretive financial maneuvers that were thrust into the spotlight the leak of millions of documents from Mossack Fonseca. See also our prior Blog post US The New Tax Haven?  

The US Treasury is lobbying for federal legislation forcing companies and other legal entities to collect full beneficial ownership information when they are formed, and file it with the US Internal Revenue Service.

The plan was revealed in a speech by Treasury deputy assistant secretary Jennifer Fowler to a financial crime conference earlier this week – coincidentally on the same day that the so-called 'Panama Papers' revelations reached the world's press.

Fowler noted that the Treasury is in the process of introducing a new rule forcing financial institutions to perform customer due diligence checks on new clients. This rule, first published in August 2014, is still under consultation, though close to being finalized.

The regulations are likely in response to the growing view of the United States as a tax haven for foreigners seeking to evade their foreign tax obligations or otherwise conceal their holdings.

The United States has also been criticized for pressuring other countries to implement the Foreign Account Tax Compliance Act ("FATCA"), which requires foreign financial institutions to report to the IRS regarding accounts with direct or indirect U.S. beneficial ownership, while failing to enact legislation that would require American banks to collect and disclose reciprocal information to foreign countries and refusing to sign on to the more wide-reaching Common Standard on Reporting and Due Diligence for Financial Account Information proposed in 2014 by the OECD. 

In its March 30th statement, the Treasury Department noted that one purpose of the new regulations will be to assist foreign countries in obtaining information regarding their own taxpayers under the United States' tax treaties and tax information exchange agreements. 

The new regulations will be issued under section 6038A of the Internal Revenue Code, which requires certain foreign owned U.S. corporations to file a Form 5472 disclosing the identity of their foreign owners and reporting certain related-party transactions. The filing requirement generally applies where more than 25% of the voting power or value of all classes of stock are owned by a single foreign owner. 

The announcement indicates that this filing requirement will be extended to foreign-owned, single-member LLCs, by treating LLCs as corporations solely for the purposes of section 6038A.  This will require such LLCs to obtain U.S. taxpayer identification numbers and report the identity of their foreign owners to the IRS, even if they own no U.S. assets and generate no U.S. source income.  Failing to file the Form 5472 can result in a $10,000 penalty, with additional incremental penalties of $10,000 if the failure continues for more than 90 days after the taxpayer is notified by the IRS.  There is no cap on the total penalty, so a persistent refusal to comply with the filing requirement could result in significant penalties. 

This is only one part of addressing the misuse of shell companies. The other is requiring that companies know and disclose their beneficial owners to the government at the time of company formation. Yet there is currently no state requirement to identify and disclose beneficial ownership information when a legal entity is created. This, Fowler admitted, is 'a longstanding weakness' in the US anti-money-laundering regime.

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1 comment:

  1. According to RIA - Thompson Reuters

    Two Treasury officials, have recently highlighted a number of the efforts being made by the Department to both enhance financial transparency and curtail tax evasion. They offered a preview of proposed regs that are expected to be released soon that would require foreign-owned limited liability companies (LLCs) to disclose their beneficial owners, as well as a preview of forthcoming final “Customer Due Diligence” regs.
    Forthcoming guidance provided information on ways that Treasury is looking to enhance transparency and reduce opportunities for tax evasion. This forthcoming guidance will be specifically targeted at two points in time, when an account is opened at a financial institution, and when a company is formed (or when company ownership is transferred).
    Treasury is expecting to, in the near future, issue proposed regs that would require foreign-owned Limited Liability Companies (LLCs) to obtain a tax identification number which will disclose their beneficial owner(s). This additional measure of transparency would strengthen IRS's ability to prevent foreign entities from facilitating U.S. tax avoidance.
    Treasury is also in the process of finalizing a Customer Due Diligence (CDD) rule, the proposed version of which was issued in proposed form on Aug. 4, 2014 (the “proposed CDD rule”). The purpose of this rule would be to “deny bad actors the ability to exploit the anonymity provided by the use of legal entities to engage in financial crimes.”
    The proposed CDD rule would require covered financial institutions to collect ownership information for legal entity customers upon opening an account. “Beneficial owners” would be identified based on a 2-prong test to identify individuals with substantial equity ownership interests (defined as direct or indirect ownership of 25% or more equity interests of a legal entity customer; the ownership prong) and with actual managerial control (the control prong).