"MEMORANDUM REPORT TO CLIENTS # 89
WITHHOLDING AND REPORTING REQUIREMENTS
FOR FOREIGN INVESTORS - TURNING THE SCREWS
Throughout 1999 we reported developments concerning the creation of an entirely new system of withholding of income tax from U.S.-source income paid to foreign persons and on the information reporting requirements related to those payments. As you may recall, the U.S. Internal Revenue Service originally issued over 500 pages of proposed and temporary regulations on income tax withholding from payments to foreign persons. Those regulations, originally scheduled to be effective from and after January 1, 1999 became the subject of substantial amendments, including a delayed effective date, until January 1, 2000. Most recently we advised you that the effective date was once again extended to January 1, 2001. Approximately two months ago, IRS once again revised many of the rules forming part of the new tax withholding system, but the effective date remains as January 1, 2001 and supposedly no further extensions are contemplated.
On a seemingly separate subject, we reported to you earlier this year on strategies being employed by the U.S. Justice Department, the OECD and similar organizations designed to combat money laundering on a geo-political basis. We advised you that as part of the International Counter-Money Laundering Act of 2000, the identification of so-called "financial crime havens" would become a central focus of law enforcement and legislative activities. We closed our previous Memorandum Reports in March and April of this year by suggesting that "Although tax evasion and money laundering are now separate criminal activities, they are so closely related by definition and by designed political thinking that the attitude of both tax and law enforcement authorities appears to be that money launderers are automatically guilty of tax fraud and tax evaders are automatically guilty of money laundering activities." The same mind set is applied to foreign jurisdictions which appear to or which actually foster such activities. Accordingly, as noted, tax havens and financial crime havens will soon be described in one breath. Once this has happened, the United States and other member governments will initiate actions against financial crimes/tax havens presently labeled under the broad general description of ‘countermeasures'.
How do these two seemingly separate series of Memorandum Reports relate to each other? Frankly, we should have taken the new tax withholding system into consideration when reporting on anti-money laundering activities as one of the "countermeasures" that will be used to turn the screws still tighter in regard to payments of U.S. source income to non-U.S. parties. Granted, that the overwhelming number and amount of investments in United States income-producing assets are made by legitimate offshore business and investment interests; however, in finalizing its income tax regulations dealing with tax withholding and the supporting requirements regarding collection, deposit, refunds and credits of amounts withheld and the related information reporting requirements, the Internal Revenue Service has managed to legislate additional changes without the benefit of action properly taken by the U.S. Congress and as a result has created a withholding system inside a withholding system...."
