What is FATCA?

The Foreign Account Tax Compliance Act of 2009 (“FATCA”) was included in the Hiring Incentives to Restore Employment ("HIRE") Act enacted in March 2010. FATCA was enacted in response to the continued perception that U.S. individuals are not reporting all of their income earned outside the U.S. either due to lax standards or intentional actions of certain foreign entities.

Who does FATCA affects and how?

FATCA is far reaching and can impact any person, US or foreign, to the extent that such person is involved in making or receiving payments that fall within the scope of FATCA. While FATCA certainly affects US withholding agents (an individual, corporation, partnership, trust, association, or any other entity, including any foreign intermediary, foreign partnership, or US branch of certain foreign banks and insurance companies that has control, receipt, custody, disposal, or payment of any withholdable payment) and US multinational companies, the greatest impact will likely be to foreign financial institutions (FFIs). According FATCA, a FFI is an entity which accepts deposits in the ordinary course of a banking or similar business, a substantial portion of its business holds financial assets for the account of others; or is engaged primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities. Accordingly, the term financial institution may include among other entities, investment vehicles such as hedge funds and private equity funds.

FATCA imposes a 30 percent withholding tax on any "withholdable payment" made either to a Foreign Financial Institution (“FFI”) or Non Financial Foreign Entity (“NFFE”). To avoid the withholding tax the FFI or NFFE must comply with the new reporting, disclosure, and related requirements. Participating FFI (“PFFI”) with the U.S. tax authorities are required to identify all accounts owned by a U.S. person or a U.S. owned foreign entity, report yearly information on U.S. owned accounts to U.S. tax authorities and comply with any required verification procedures.

Alternatively, local banks without international operations can choose to apply for the “Deemed-Compliant FFI” status. In this case they have to implement procedures to ensure that they do not open or maintain accounts owned by non-residents of their jurisdiction and by non-participating FFIs.

Where can you find the rules?

The IRS issued guidance in form of 3 notices, Notice 2010-60 in 2010, Notice 2011-34 on April 2011 and Notice 2011-53 on July 14, 2011, to allow affected persons time to implement the systems and processes necessary to comply fully with the new withholding, documentation and reporting obligations resulting from FATCA. Awaiting additional guidance from regulators, many FFI have yet started the process of preparing for FATCA – a process expected to take almost two years to complete. If companies do not plan early enough, they will not be able to modify existing processes to request, collect, review and store required account holder information. The biggest challenge for almost any institution is understanding how the new US regulation specifically impacts their organization.