The Tax Extenders Act of 2009

US proposed legislation requires foreign financial institutions to enter into agreements with the IRS to avoid 30% withholding tax on all US-sourced income and capital payments.

On December 9, 2009, the House of Representatives ( United States ) passed the “Tax Extenders Act of 2009” (“TEA”). The Senate is currently reviewing TEA, and it is likely that the Senate will approve the contents therein. The TEA reintroduces the Foreign Account Tax Compliance Act of 2009 (“FATCA”) with certain helpful amendments. Its purpose is to prevent the avoidance of tax on income and proceeds from assets held abroad by United States ’ (“ US ”) citizens or residents. The TEA was designed to provide greater disclosure to the Internal Revenue Service (“IRS”) by foreign financial institutions in respect of assets held by them by US persons. The United States Government has concluded that many U.S. individuals looking to evade their tax obligations in the United States have sought to hide income and assets from the IRS by opening secret foreign bank accounts with foreign financial institutions. Because many of the foreign financial institutions that hold accounts on behalf of U.S. persons are outside the reach of U.S. law, US legislators have determined that the appropriate solution is to impose taxes on foreign financial institutions, many of which have substantial investments in U.S. financial assets or hold substantial U.S. financial assets for the account of others.

It is an extremely important bill and will change the way trust and financial services providers in The Bahamas conduct business in the future. Under the TEA, foreign financial institutions are required to determine which of its equity and debt holders (and certain other of its counterparties and other “account holders”) are US persons and to report this information to the IRS or otherwise be subject to a 30% withholding tax on its U.S.-source income and/or the proceeds of certain sales and other dispositions. The withholding tax could be avoided only if the foreign financial institution enters into an agreement with the Treasury or the IRS to provide information relating to US persons that directly or indirectly maintain an account at such financial institution.