FATCA regulations' effective date approaching quickly.

• Author: Kelleher, John M.
• Position: Foreign Account Tax Compliance Act

On March 18, 2010, the Foreign Account Tax Compliance Act (FATCA), P.L. 111-147, was signed into law. FATCA comprises chapter 4 in the Code, consisting of Sees. 1471-1474. This new chapter is separate and distinct from chapter 3, which deals with withholding on payments of certain periodic U.S.-source income to nonresidents.

In the three years since the law was enacted, the IRS has issued guidance through a series of notices and proposed regulations to allow foreign financial institutions (FFIs) to prepare for FATCA. The long-awaited final regulations were released on Jan. 28, 2013 (T.D. 9610). In July, Notice 2013-43 postponed certain implementation dates for six month to assist U.S. withholding agents and FFIs. While most of the attention has been directed at the impact FATCA may have on FFIs used by certain U.S. persons to hide income offshore, its reach is much broader. In fact, FATCA affects a broad range of individuals and entities.

FATCA is intended to encourage tax compliance and reduce U.S. tax evasion. The approach taken by Treasury and the IRS has been to encourage FFIs to enter into agreements with the United States to provide information on the accounts of U.S. taxpayers. The "encouragement" is in the form of a 30% withholding tax, as provided under Sec. 1471(a), on all payments to the FFI of U.S.-source fixed, determinable or annual, periodic (FDAP) income (and, after Dec. 31, 2016, gross proceeds from the sale or other disposition of property of a type that can produce interest or dividends that are U.S.-source FDAP income) if the FFI does not enter into an agreement to participate and share certain requested data.

In addition, Sec. 1472 makes FATCA applicable to certain non-FFIs considered to be nonfinancial foreign entities (NFFEs). To be exempt from withholding, these entities must certify to the withholding agent that they have no substantial U.S. owners, or provide the name, address, and tax identification number of any substantial U.S. owners. The withholding tax will potentially apply even if a double-tax treaty would otherwise reduce the rate of withholding on the payment to zero.

Any person that makes a payment of U.S.-source FDAP income to a foreign person is a withholding agent. A withholding agent is responsible for determining the FATCA status of the payee and determining whether the 30% withholding applies. Therefore, all withholding agents need to consider how FATCA will affect them, determine what payment...