According to Law360  the First Circuit Court of Appeals overturned an earlier $234 million victory for Santander Holdings USA Inc. after ruling on December 16, 2016 that an internal securities transaction the bank had engaged in lacked economic substance and does not qualify for foreign tax credits.  

On November 16, 2015 we posted Judge Rules Thant IRS Owes $234M To Sovereign Bancorp  where we discussed that a Massachusetts federal judge ruled that Sovereign Bancorp can recover some $234 million that it paid in taxes, interest and penalties to the federal government over an international securities transaction, finding the deal had a business purpose outside its tax benefits.

Granting a motion for summary judgment by Sovereign, now Santander Holdings USA Inc. and denying a cross motion for partial summary judgment by the federal government, U.S. District Judge George A. O’Toole Jr. decided that the so called structured trust advantaged repackaged securities, or STARS, transaction had economic substance. 

Now a three-judge panel unanimously held that the structured trust advantaged repackaged securities, or STARS, transactions set up by Sovereign Bancorp Inc., Santander’s predecessor, had only tax avoidance features with no bona fide business purpose or real economic risks. 

“The STARS Trust transaction itself does not have a reasonable prospect of creating a profit without considering the foreign tax credits, and, as a result, it is not a transaction for which Congress intended to give the benefit of the foreign tax credit,” Circuit Judge Sandra Lynch wrote on behalf of the panel, saying that the lower court had erred in concluding otherwise.

The transaction involves a process in which Sovereign created a trust in 2003 into which it ultimately contributed about $6.7 billion of its U.S. located income producing assets. The trustee was a U.K. citizen subject to British taxes, and while the trust was also subject to U.S. federal income tax, it could claim a tax credit for taxes paid to the U.K. government.

Sovereign then partnered with Barclays Bank, which acquired a $1.15 billion interest in the trust, but sold it right back to Sovereign for the same amount. Sovereign treated the $1.15 billion contribution from Barclays as a loan, and the trust entered into a series of transactions that generated a U.K. tax benefit for Barclays.

The transactions involved the trust distributing funds to a blocked Barclays account that Barclays could not access but which allowed it to formally hold the funds in its name and be subjected to U.K. taxes. The blocked account then immediately returned the funds to the trust, resulting in Barclays being entitled to a tax credit and allowed to deduct its re-contributions to the trust as a tax loss.

The panel agreed with the U.S. government that Sovereign’s U.K. tax was artificially generated through a series of circular cash flows through the trust and that Sovereign subjected its property and income to U.K. taxation “only because it anticipated it could avoid U.S. taxes through the resulting U.S. tax credit.”

The case is Santander Holdings USA v. United States, case number 16-1282, in the U.S. Court of Appeals for the First Circuit.

Have A Tax Problem? 

 

Soon, the IRS will launch a new

1. Qualified Intermediary (QI),
2. Withholding Foreign Partnership (WP) and
3. Withholding Foreign Trust (WT) system

allowing these entities to manage their information online. The QI, WP and WT related questions will be available in the new system.

Additional information on the updates to the FATCA Online Registration System is available via the FATCA Online Registration user guide.

On April 15, 2016 we posted US Pressured For Beneficial Ownership Rules where we discussed that in a speech by Treasury deputy assistant secretary Jennifer Fowler to a financial crime conference earlier in April noted that the Treasury is in the process of introducing a new rule forcing financial institutions to perform customer due diligence checks on new clients.

This rule, first published in August 2014, is still under consultation, though close to being finalized. We also discussed that the regulations are likely in response to the growing view of the United States as a tax haven for foreigners seeking to evade their foreign tax obligations or otherwise conceal their holdings.
The Treasury Department noted in its March 30th statement that one purpose of the new regulations will be to assist foreign countries in obtaining information regarding their own taxpayers under the United States' tax treaties and tax information exchange agreements. 

The new regulations where to be issued under section 6038A of the Internal Revenue Code, which requires certain foreign owned U.S. corporations to file a Form 5472 disclosing the identity of their foreign owners and reporting certain related-party transactions. The filing requirement generally applies where more than 25% of the voting power or value of all classes of stock are owned by a single foreign owner. 

The IRS has now issued these regulations as final on 12/12/2016a nd they treat a domestic disregarded entity wholly owned by a foreign person as a domestic corporation separate from its owner, but only for the reporting, record maintenance and associated compliance requirements that apply to 25% foreign-owned domestic corporations under Code Sec. 6038A.
 
These changes are intended to provide IRS with improved access to information that it needs to satisfy its obligations under U.S. tax treaties, tax information exchange agreements and similar international agreements, as well as to strengthen the enforcement of U.S. tax laws. TD 9796, 12/12/2016; Reg. § 1.6038A-1, Reg. § 1.6038A-2, Reg. § 301.7701-2. These regulations are effective December 13, 2016.