US Tax Haven Bill - BVI no longer included in controversial clause

On July 12, 2011, United States Senator Carl Levin (D – Michigan) introduced the Stop Tax Haven Abuse Act of 2011 (the "Bill"). A prior version of the Bill was introduced in 2009. The Bill contains several provisions of interest to private fund managers, including provisions that:

Treat foreign corporations whose management and control occur primarily in the United States as U.S. domestic corporations for income tax purposes;

Clarify under the Foreign Account Tax Compliance Act ("FATCA") when foreign financial institutions and U.S. persons must report foreign financial accounts to the IRS;

Treat Credit Default Swap ("CDS") payments sent offshore from the United States as taxable U.S. source income; and

Require Anti-Money Laundering ("AML") programs for hedge funds, private equity funds, and formation agents to ensure screening of offshore clients.

The Bill also authorizes the Treasury Secretary to take special measures against foreign jurisdictions or financial institutions that impeded U.S. tax enforcement, as well as imposes additional disclosure requirements on multinational corporations by requiring them to include basic information on a country-by-country basis in their filings with the SEC. Notably, the Bill does not include a controversial proposal in the 2009 bill that specifically identified 34 "Offshore Secrecy Jurisdictions", including the Cayman Islands and British Virgin Islands.

Foreign Corporations Treated as Domestic Corporations

Section 103 of the Bill prevents companies that are run from the United States from claiming foreign tax status if those foreign corporations have gross assets of $50 million or more. The provisions indicate that gross assets includes "assets under management for investors, whether held directly or indirectly." For corporations primarily holding investment assets, the management and control is treated as occurring primarily in the United States if "decisions about how to invest the assets are made in the United States." These provisions if enacted could potentially eliminate any benefits of establishing offshore funds, which are primarily established for offshore and U.S. tax-exempt investors.

The U.S. Foreign Account Tax Compliance Act ("FATCA") imposes a 30% withholding tax on U.S. persons holding offshore accounts on certain "withholdable payments" to "foreign financial institutions" which do not provide information about their U.S. accounts to the Internal Revenue Service.