Proposed Legislation Focused on Offshore Tax Evasion

On October 27, 2009, proposed legislation developed by the Administration and the Congressional tax committees to combat offshore tax evasion was released. At this time, we believe that there is a relatively high likelihood that the central parts of the Bill will be enacted. Key provisions of the proposal would (i) create a complicated and expansive reporting and withholding regime (which we have dubbed “QI 2.0”) intended to force foreign financial intermediaries and investment vehicles to identify U.S. account holders and investors, including U.S. investors who may be hiding behind foreign entities, (ii) repeal the foreign-targeted bearer bond exception of TEFRA (and the related exception to the portfolio interest exemption), so that debt sold in international capital markets cannot be in bearer form, and (iii) impose withholding tax on dividend equivalent amounts on equity swaps in respect of U.S. stocks (subject to exceptions to be determined under Treasury guidance).

The QI 2.0 regime’s reporting and withholding rules would extend beyond traditional financial institutions to virtually every type of foreign investment entity (including foreign hedge funds, private equity funds, securitization vehicles and other investment vehicles, whether widely held or privately owned). These new rules will pose potentially substantial compliance burdens on these entities, and to a lesser extent on U.S. withholding agents. The proposed legislation sets forth a framework for the QI 2.0 regime; the Treasury Department and the Internal Revenue Service will face the challenge of developing detailed and complex guidance that balances the tax compliance objectives of the rules against their administrability and cost.

The attached Alert Memo summarizes the Bill’s principal provisions, identifies certain key issues raised by the QI 2.0 regime and other provisions of the Bill, and provides preliminary observations regarding its implications for various types of financial intermediaries, including banks, securities firms, investment entities and securitization vehicles.

Please feel free to contact any of your regular contacts at the firm or any of our U.S. partners and counsel listed under Tax if you have any questions.