Last November, President Obama said that the United States has become “lazy” about attracting foreign investment, and suggested the government should become “more aggressive” to attract overseas dollars.
Well, Mr. President, I have several suggestions. First, repeal the notorious Foreign Account Tax Compliance Act (FATCA), which will impose a 30% withholding tax on many money transfers out of the United States when it comes into effect in 2014. .After all, if people are investing in the United States, they might want to be able to get their money back out at some future point. And they’d probably like to get it without a 30% haircut on both their investment principal and whatever after-tax profits they’ve generated from it. Yes, Mr. Obama, I know you championed this legislation and signed it with great flourish in 2010. But everyone makes mistakes. This was a huge one, and you should own up to it.
Second, get rid of the ridiculously low estate tax threshold for non-resident aliens who invest in the United States. Absent a more favorable treatment via an estate tax treaty with the country in which they’re resident, the entire value of their U.S. investments is subject to U.S. estate tax, less a $60,000 exemption. “Entire value” means any mortgage or other encumbrance on their real estate or other investments are ignored for estate tax purposes. That means a non-resident alien could own a $300,000 house with a $250,000 mortgage, and his heirs would be subject to estate tax on the entire $300,000.
Third, eliminate the “exit tax” on U.S. citizens and long-term residents who permanently end U.S. residence and (in the case of citizens) give up their U.S. citizenship. The possibility that U.S. immigrant investors who are financially successful will eventually have to pay a stiff tax above and beyond the taxes already paid on income or capital gains makes it less likely they’ll come in the first place. Yes, I know you voted in favor of the bill containing the exit tax provisions in 2008, when you were a member of the U.S. Senate. But again, everyone makes mistakes…sometimes more than once.
Fourth, eliminate some of the outrageous and little-known reporting obligations with which non-resident alien investors in the United States must comply. A case in point: Any U.S. business in which a foreign individual or company owns a 10% or greater interest must comply with comprehensive information reporting requirements administered by the Department of Commerce. These reporting requirements are in addition to the extensive and often duplicative reporting requirements required of non-resident alien investors by the U.S. Treasury and IRS. See here for an example.
The Department of Commerce requires a:
“I. Quarterly report: For reporting positions and transactions of a U.S. affiliate with its foreign parent(s) and foreign affiliates of its foreign parent(s) on the Quarterly Survey of Foreign Direct Investment in the United States (Form BE-605);
II. Annual report: For reporting financial and operating data of a U.S. affiliate on the Annual Survey of Foreign Direct Investment in the United States (Forms BE-15A, BE-15B, BE-15(EZ), and BE-15 Claim for Exemption); and
III. Benchmark report: For reporting financial and operating data of a U.S. affiliate, as well as positions and transactions of the U.S. affiliate with its foreign parent(s) and foreign affiliates of its foreign parent(s) on the Benchmark Survey of Foreign Direct Investment in the United States (Forms BE-12(LF), BE-12(SF), BE-12 Bank, BE-12 Mini, and BE-12 Claim for Not Filing).”
Confused yet? Well, if not,
“A U.S. affiliate must file on a fully consolidated domestic U.S. basis, including in the full consolidation all U.S. business enterprises in which it directly or indirectly owns more than 50% of the outstanding voting interest. The fully consolidated entity is considered one U.S. affiliate.”
And, oh yes, “Whoever willfully fails to report shall be fined not more than $10,000 and, if an individual, may be imprisoned for not more than one year, or both.” Take that, foreign investors, if you actually thought you could take advantage of the current weakness in the U.S. dollar and real estate prices to get some great deals!
Now, I don’t think there’s a snowball’s chance in hell that Obama will propose that Congress abolish, simplify, or reduce the compliance burden of these requirements in any way. Quite the opposite. For instance, Obama wants to increase the top estate tax rate from 35% to 55%, beginning in 2013. But fortunately, planning opportunities exist to deal with FATCA, the exit tax, and the low estate tax threshold for non-resident alien investors. And, if you’re a non-resident alien owning U.S. real estate purely for personal use, you’re exempted from the Department of Commerce reporting provisions, although you still may need to file Form BE-12, “Claim for Not Filing.”
Confused? If you’re a non-resident alienconsidering U.S. investments, The Nestmann Group, Ltd. can help you set you up the appropriate structures and compliance mechanisms to make sure you don’t get caught in the U.S. tax and reporting “mousetrap.”
