The 1977 OECD Model Tax Convention introduced the term "beneficial owner" in Articles 10, 11 and 12 of the treaty as a possible solution to tax avoidance and evasion. The beneficial owner concept was further strengthened with the introduction of the Limitation of Benefits Article in the U.S. Model Tax Treaties. Even today most countries do not have an exact definition of "beneficial ownership" implemented in local legislation.
However, in accordance with the technical explanation of the U.S. Model tax treaty, "beneficial owner refers to any person resident in a Contracting State, to whom that State attributes the income for tax purposes". Therefore, the beneficial owner must meet the tax treaty definitions of a "Person" (Article 3), "Resident" (Article 4) and must be the one to whom the country of residence constructively attributes the income for tax purposes. This concept has raised many questions regarding fiscally transparent entities, hybrids and conduit structures, and is, therefore, subject to further development both in the OECD and the USA.
The purpose of the W-8 Withholding Certificates is to indicate the alien status of the payee and to declare that:
Based on the position taken on the relevant withholding certificate, the payor determines the proper amount of tax to deduct and the tax rate or exemption that apply. Thus, depending on the type of form and the underlying tax position, a U.S. tax ID number may or may not be required.
The Hiring Incentives to Restore Employment (HIRE) Act of 2010 (Pub. L. 111-147) introduced the Foreign Account Tax Compliance Act (FATCA). The FATCA made changes to the Internal Revenue Code aiming to strengthen the reporting requirements for US taxpayers with financial accounts held by foreign financial institutions. In addition, the FATCA has closed the loopholes that allowed foreign investors to avoid US withholding tax on dividends through swap contracts. Effective January 1st 2014 foreign financial institutions will be required to identify high-value accounts held by US taxpayers and report them to the Internal Revenue Service. Foreign financial institutions that do not comply with the FATCA regulations face an onerous 30 % withholding on gross payments from US sources.
Under the general rule of Section 6501 of the Internal Revenue Code, the IRS is required to assess the correct amount of tax liability within 3 years from the date the taxpayer filed the tax return. A tax return filed before the return due date, which is April 15th for most taxpayers, is considered filed on the return due date. However, there are certain exceptions to the general rule. For instance,
1. If a tax return omits more than 25% of gross income, the IRS may assess the taxes due within 6 years from the date the tax return was filed.
2. If no tax return is filed at all, the IRS may assess the taxes due at any time, indefinitely.
3. If a fraudulent return is filed, or in an event of a willful attempt to evade taxes, the IRS may assess the taxes due, at any time, indefinitely.
After the assessment, the IRS is given additional 10 years to collect the taxes by any means, including levies, seizures, liens, and garnishments.
The Foreign Bank Account Report (FBAR) was introduced by the provisions of the Bank Secrecy Act of 1970. The FBAR must be filed by a U.S. person with a substantial interest, signature or other authority, over at least one financial account maintained by a financial institution physically located outside the United States and the U.S. possessions. The filing requirement is triggered once the aggregate amount held in all foreign financial accounts exceeds $10,000.00 or the equivalent in a foreign currency, at any point during the calendar year. Complete information, including definitions related to the FBAR filing requirement, is available in our FBAR article.