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US Treasury Drafts Beneficial Ownership Legislation

by Mike Godfrey,, Washington

09 May 2016

The US Treasury Department has announced a customer due diligence (CDD) final rule, proposed beneficial ownership legislation, and proposed regulations related to foreign-owned, single-member limited liability companies (LLCs), in an effort to target tax evasion, money laundering, and other illicit financial activities.

A Treasury release said: "Together, these efforts target key points of access to the international financial system – when companies open accounts at financial institutions, when companies are formed or when company ownership is transferred, and when foreign-owned US companies seek to evade their taxes."

Treasury Secretary Jacob Lew also highlighted the new proposed measures in a May 5 letter to the US Congress, urging it to act. "The Treasury Department has long focused on countering money laundering and corruption, cracking down on tax evasion, and hindering those looking to circumvent our sanctions," he said. "The actions we are finalizing today mark a significant step forward to increase transparency and to prevent abusive conduct within the financial system."

The CDD final rule adds a new requirement that financial institutions – including banks, brokers, or dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities – collect and verify the personal information of the beneficial owners who own, control, and profit from companies when those companies open accounts.

Specifically, the rule contains three core requirements: identifying and verifying the identity of the beneficial owners of companies opening accounts; understanding the nature and purpose of customer relationships to develop customer risk profiles; and conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.

With respect to the new requirement to obtain beneficial ownership information, financial institutions will have to identify and verify the identity of any individual who owns 25 percent or more of a legal entity, and an individual who controls the legal entity. The proposed implementation period of the rule is extended over two years.

Treasury has sent to Congress proposed beneficial ownership legislation that would require companies to know and report adequate and accurate beneficial ownership information at the time of a company's creation, so that the information can be made available to law enforcement. As part of the legislation, companies formed within the United States would be required to file beneficial ownership information with Treasury. There would be penalties for failure to comply.

Treasury also announced proposed regulations to require foreign-owned "disregarded entities," including foreign-owned single-member LLCs, to obtain a tax identification number with the Internal Revenue Service (IRS), so as to curb their possible use to avoid US tax.

Overall, it was said, the US federal tax system "has very strong information reporting requirements for most types of entities formed in the United States. These requirements allow the IRS to determine whether there is any federal tax liability and if so, how much, and to share information with other tax authorities as appropriate. However, there is a narrow class of foreign-owned US entities – typically single member LLCs – that have no obligation to report information to the IRS or to get a tax identification number. These 'disregarded entities' can be used to shield the foreign owners of non-US assets or non-US bank accounts."

Once these regulations are finalized, they should allow the IRS to determine whether there is any tax liability, and if so, how much, and to share information with other tax authorities.

TAGS: compliance | tax | business | company formation | tax compliance | tax avoidance | law | Internal Revenue Service (IRS) | enforcement | ministry of finance | tax authority | legislation | United States | regulation | penalties | Tax | Tax Evasion

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