Introduction
The United States has long favoured foreign investment and, historically. The US government has imposed few restrictions on foreign investment inflows. Skepticism of investment from China continues to be a notable – and bipartisan – exception to this. The general policy of openness to foreign investment.3 Such investment is subject to review and remedial action on national security grounds. The Committee on Foreign Investment in the United States (CFIUS). CFIUS’s most recent piece of authorizing legislation is the Foreign Investment Risk Review Modernisation Act of 2018 (FIRRMA). While notifying a transaction to CFIUS remains voluntary in most circumstances. FIRRMA has created mandatory filing requirements for transactions involving certain types of US businesses and foreign investors. In addition to this general national security screening regime, the United States has some sector-specific limitations. Also, review procedures that govern foreign investment in regulated industries[1].
Laws and regulations
The US national security review process for foreign investment is governed by Section 721 of the Defense Production Act and is generally referred to as ‘the CFIUS process’. Thereafter the interagency body administers it. CFIUS is composed of nine voting members: Treasury (its chair), and the White House’s Office of Science and Technology Policy. The US Trade Representative, and the Departments of Commerce (Commerce), Defense, Energy, Homeland Security, Justice, and State. The Department of Labor and the Office of the Director of National Intelligence are ex officio non-voting members. Other executive branch agencies may be temporarily added as voting members on a case-to-case basis. (e.g., the US Department of Agriculture might add in an agribusiness transaction).
Transaction parties will interact mostly with Treasury before and during a review as Treasury manages the overall process, maintains the web portal parties use to submit filing documents (the Case Management System or (CMS)), and communicates CFIUS’s findings and decisions to the transaction parties on behalf of CFIUS. However, the lead agencies – namely, those with the strongest equities – will co-lead on substance, including negotiation of mitigation terms if warranted.
Understanding the Glass-Steagall Act
Commercial banks were accused of being too speculative in the pre-Depression era because they were diverting funds to speculative operations. Thus, banks became greedy, taking on huge risks in the hopes of even bigger rewards. Banking itself became sloppy, and objectives became blurred. Unsound loans issued to companies. Which the bank had invested, and clients would be encouraged to invest in those same stocks.
Senator Carter Glass is a former Treasury secretary and the founder of the United States Federal Reserve System. The primary force behind passing the Glass-Steagall Act along with Henry Bascom Steagall. Steagall was a member of the House of Representatives and chair of the House Banking and Currency Committee. Steagall agreed to support the act with Glass after an amendment was added permitting bank deposit insurance. Which was responsible for creating the Federal Deposit Insurance Corporation (FDIC).
In response to one of the worst financial crises at the time. The Glass-Steagall Act set up a regulatory firewall between commercial and investment bank activities. Banks gave a year to choose between specializing in commercial or investment banking. Only ten percent of commercial banks’ total income could stem from securities; however, an exception allowed commercial banks to underwrite government-issued bonds[2].
Federal Taxation
The US has two different taxation systems for US persons and non-US persons. US persons are subject to taxation on their worldwide income (including all foreign-source income). Although they allowed crediting some or all of foreign taxes paid in many circumstances. Non-US persons are only subject to US income tax on income deemed to be sourced in the US.
A US person is defined as a US citizen, green card holder, or US resident alien. A person is generally considered a US resident alien if he stays in the US for a certain number of days in the current and two prior years (substantial presence test). A person meets the substantial presence test if he is physically present in the US on at least both:
- 31 days during the current year.
- 183 days during the three-year period that includes the current year. The two years immediately before the current year, counting:
- all the days he was present in the current year;
- one-third of the days he was present in the first year before the current year; and
- one-sixth of the days he was present in the second year before the current year.
The taxation of non-resident aliens is limited to US source income. There are two main taxation schemes based on the following two categories of income:
Fixed, determinable annual, periodical (FDAP) income (the investment income). This commonly includes passive income or income not effectively connected with a US trade or business. Common examples of FDAP income are US source interest and dividends. FDAP income is taxed at 30% unless a reduced rate applies under a tax treaty.
Effectively connected income (ECI) (trade or business income).
Income that is effectively connected with a US trade or business is taxed on a net basis (that is, income less allowable deductions) at the same federal income tax rates that apply to US citizens or residents. State and local taxes may increase the effective tax rate on income from a US trade or business. Non-resident individuals engaged in a trade or business within the US during.
The taxable year must file a return and pay tax at regular US progressive tax rates (up to 37%) on income deemed to be effectively connected with such trade or business. Income effectively connected with a US trade or business may not be subject to US tax if there is an income tax treaty in effect with the non-resident’s country of residence. Under most treaties entered into by the US, business profits of a non-resident are not subject to US tax unless these are attributable to a permanent establishment in the US. Generally, a permanent establishment is a fixed place of business (for example, an office, factory, mine, or place of management) through which a non-resident wholly or partly carries on its activities.
[1] http://www.sice.oas.org/investment/natleg/us/usfiac.asp
[2] https://content.next.westlaw.com/8-607-9347?__lrTS=20200902144656296&transitionType=Default&contextData=(sc.Default)&firstPage=true
