The Foreign Account Tax Compliance Act: how non-US financial entities should navigate FATCA

Exchange - International: Financial Services Regulation Newsletter Series

The Foreign Account Tax Compliance Act, or FATCA, as it is colloquially known, refers to Chapter 4 of the US Internal Revenue Code, which was enacted by the Hiring Incentives to Restore Employment (HIRE) Act on March 18, 2010.

 

FATCA requires non-US foreign financial institutions (FFIs), including banks, investment banks, brokers, trust companies, investment funds, life insurance/reinsurance companies and all other investment vehicles, and non-US non-financial entities (NFFEs) to identify and disclose their US account holders and members or become subject to a new 30 percent US withholding tax (the FATCA withholding tax) with respect to payments of US source income and proceeds from the sale or disposition of US stocks and securities.

 

The fundamental purpose of FATCA is to identify US taxpayers who hold assets abroad, directly or through non-US entities, in order to counter US tax evasion. The ultimate goal of the legislation is for the United States to obtain information with respect to offshore accounts and investments beneficially owned by US taxpayers, rather than the collection of tax through the FATCA withholding tax.

 

FATCA will have a direct and profound impact on FFIs that have US proprietary investments, US account holders or US financial dealings. FATCA’s impact will be magnified by the cascading of international financial transactions flowing through financial entities. Each time an FFI receives or makes a payment that is a Withholdable Payment, it will be impacted by FATCA. Under US law, an FFI is a US withholding agent.

 

FATCA enters into force January 1, 2013. The US Internal Revenue Service has issued two Notices setting forth their preliminary thinking as to how FATCA will be implemented. The IRS is in the process of drafting regulations to provide more comprehensive guidance.

 

For a fuller discussion of FATCA, including a brief overview, a summary of significant issues that may affect the implementation of FATCA, a briefly summary of Notice 2010–60, a detailed overview of Notice 2011–34, and, finally, notes on how affected entities should proceed to decide how to navigate this important new legislation, please click here.

 

And read issue 10 of Exchange – International here