Foreign Account Tax Compliance Act update.

AuthorSchwarz, Jean-Paul

The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147. It requires foreign financial institutions (FFIs) to enter into an agreement with the IRS to (1) perform due diligence regarding their investors to determine whether or not they have direct or indirect U.S. investors, (2) report information about their direct and indirect U.S. investors, and (3) withhold amounts payable to investors who refuse to provide information to the FFI (recalcitrant account holders) and other FFIs that do not comply with their obligations under FATCA (noncompliant FFIs), or FFIs that elect to have funds withheld.

If an FFI does not enter into an agreement with the IRS (or qualify for the benefits of an intergovernmental agreement (IGA)), it will be subject to a 30% withholding tax on its U.S.- source interest and dividends (FDAP) and gross proceeds from the disposition of property that gives rise to U.S.-source interest and dividends. It is generally believed that compliance under an IGA will be simpler than compliance through an FFI agreement.

Treasury has published two model IGAs. Under the Model 1 IGA, FFIs would report information about U.S. account holders to their government without having to enter into an FFI agreement. The local government then would report the information to the IRS. Under the Model 2 IGA, the FFIs are required to enter into an FFI agreement and must comply with the requirements as modified by the terms of the IGA. Under both models, the FFIs are required to register with the IRS.

Revised Timelines

In response to concerns of FFIs and practitioners, the IRS on July 12 announced in Notice 2013-43 that it will amend the final regulations to revise timelines for the implementation of certain key dates (generally by six months) as well as provide additional guidance concerning the treatment of FFIs located in jurisdictions that have signed IGAs, but have not yet brought those IGAs into force. Key changes included:

* The online FATCA registration portal opened on Aug. 19, 2013, instead of July 15, 2013, as was originally scheduled;

* Withholding on interest and dividends from U.S. securities will begin on July 1, 2014, instead of Jan. 1, 2014, for payments made on and after that date to payees that are FFIs or nonfinancial foreign entities, for obligations that are not grandfathered obligations, unless the payments can be reliably associated with...

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