December 17, 2010
The Foreign Account Tax Compliance Act (FATCA), which was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act on March 18, 2010, increases the ability of the Internal Revenue Service (IRS) to police tax evasion by U.S. persons holding financial assets outside the United States.
By levying a punitive tax withholding on certain payments, FATCA compels foreign financial institutions (FFIs) to enter into agreement with the IRS to obtain and report information on their U.S. clients and investors. FFIs that do not enter into an agreement with the IRS or report information on their U.S. clients may be subjected to 30% withholding on interest, dividends and gross proceeds.
FFIs are broadly defined as those entities that accept deposits, hold financial assets and engage in the investing, re-investing or trading of financial assets. The institutions covered include:
- Banks (including savings, commercial, savings and loan and credit unions)
- Broker-dealers, clearing organizations, custodian banks, trust companies and custodians for employee benefit plans
- Mutual funds, fund of funds, exchange traded funds, hedge funds, private equity and venture capital funds, other managed funds, commodity pools and investment vehicles, private investment companies and private trust arrangements
The law may require firms to implement considerable enhancements to systems and processes related to collecting and reporting client information. These would include enhanced know-your-customer and anti-money laundering policies and procedures, recordkeeping, reporting and documentation. Further, global organizations will need to review the status of all subsidiaries and affiliates to determine consistent organizational approach and identification with the IRS.
Most provisions of FATCA are effective for payments made after December 31, 2012; proposed regulations are forthcoming from the IRS and the Department of the Treasury. For additional details on the legislation, please visit www.irs.gov to view the piece on FATCA in the 2010 report issued by the Information Reporting Program Advisory Committee. For commentary, see the following letters issued by the Securities Industry and Financial Markets Association (SIFMA):
Pershing will continue to monitor the progress of the IRS and Treasury as regulations are developed. We will provide you with updates as they become available.