Editor's Note: Expat blogs and forums are abuzz about the impact of the Hiring Incentives to Restore Employment Act, or HIRE Act for short, that goes into effect in January. According to U.S. CPA Matthew Apodaca, most of the information you read is simply not true, particularly the suggestion of a 30% withholding tax for money transfers out the U.S. Here, he sets the record straight.
By Matthew Apodaca, CPA
Is the 30% Federal withholding tax associated with the HIRE Act going to affect you if you have funds in an account overseas?
Short answer: No.
Misinformation around this has snowballed. Sloppy reporting and a misunderstanding of the HIRE Act means that the mainstream media has repeated common errors instead of going back to the hard facts. It’s caused confusion and worried a lot of good folks unnecessarily. But you just have to look at the Internal Revenue Service source material to set the record straight.
The HIRE Act aims to expand the IRS’s ability to track taxable dollars (specifically, assets held by U.S. citizens) in foreign financial instruments, like bank accounts, investments, and business interests. Its purpose is to have foreign institutions either disclose account-holder information to the IRS or generate 1099s and other tax forms reporting taxable transactions to the IRS, just as U.S. institutions do. When a foreign financial institution agrees to this, the institution receives an exemption from the IRS on the 30% withholding tax.
Most foreign institutions invest some of their assets in the U.S., seeking income from them. Under the HIRE Act, if the foreign institution refuses to comply or file for an exemption, then it will have 30% withheld from the institution’s U.S.-source income. This is a huge burden for most foreign institutions. To avoid this, a foreign financial institution will either file for the exemption or quit working with U.S. citizens.
Two things are important to understand:
1. If you’re banking overseas with an institution that has filed for an exemption with the IRS, then you will not be affected by the 30% withholding tax.
2. This withholding requirement is associated with institution-to-institution payments from U.S financial institutions to foreign financial institutions. It does not affect funds going in the other direction nor individual client accounts.
Essentially, the HIRE Act seeks to disclose the financial activities of U.S. citizens investing abroad. To accomplish this, it has two broad sections: The first is aimed at individuals and requires additional disclosures on their individual activity. The second section speaks to foreign institutions, requesting that they disclose the activities of U.S. citizens, just as U.S. financial institutions do. It leaves foreign financial institutions with a choice:
Comply with these U.S. reporting requirements…or stop taking funds from U.S. citizens.
It’s impossible to know how many institutions worldwide will take this route.
The HIRE Act does not impose an exit tax. If you transfer money from your U.S. bank account to a foreign bank account, the 30% withholding under the HIRE Act does not apply.