FATCA: should U.S. financial institutions be concerned?

• Author: Dudley, Ryan
• Position: Foreign Account Tax Compliance Act

The tax community is currently awaiting IRS guidance on some of the most globally penetrating tax legislation the U.S. government has ever passed: the rules under the Foreign Account Tax Compliance Act (FATCA).

Following the discovery of so many previously undisclosed foreign bank and securities accounts as part of the Foreign Bank and Financial Account Report Voluntary Disclosure Program that ended October 15, 2009, Congress enacted FATCA to force foreign financial institutions to identify U.S. account holders and reveal details about their accounts to the IRS. The legislation, as drafted, requires foreign financial institutions to potentially collect an enormous amount of information about both their U.S. and foreign customers to share with the IRS or face a harsh 30% withholding regime on a wide range of U.S.-sourced receipts.

Some relief from these broad reporting requirements is expected through the regulations, but it is not clear whether such regulatory relief will be sufficient to prevent the FATCA reporting regime from being more onerous than the reporting requirements currently imposed on U.S. financial institutions. Once FATCA is in place, other countries are likely to adopt similar reporting regimes. This raises questions about the potential reporting obligations U.S. financial institutions will be facing in the years to come.

Legislative Background

FATCA was proposed in 2009 and was subsequently incorporated into the Hiring Incentives to Restore Employment (HIRE) Act of 2010, P.L. 111-147, which was signed into law on March 18, 2010. In order to allow financial institutions to modify their systems and potentially communicate the changes to the existing customer base, the FATCA provisions (Secs. 1471-1474) will take effect from January 1, 2013.

Withholding Regime

In broad terms, FATCA requires any person in control or possession of a "withholdable payment" to be made from the United States to a foreign "financial institution" (and certain other foreign entities) to withhold 30% of the withholdable payment and remit it to the IRS.

A financial institution is an entity that accepts deposits in the ordinary course of a banking or similar business, holds financial assets on account for others as a substantial portion of its business, or is engaged in investing or trading in securities (Sec. 1471(d)(5)). This definition would presumably include banks, savings institutions, insurance companies, investment companies, and hedge funds.

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