IRS And US Treasury Release Proposed Regulations Under FATCA

On February 8, 2012, the IRS and US Treasury released 389 pages of proposed regulations under the Foreign Account Tax Compliance Act (FATCA), which was enacted for the purpose of combating offshore tax evasion. To achieve this goal, FATCA imposes a non-refundable withholding tax (FATCA withholding) of up to 30% (subject to exemptions or reduced rates by reason of an applicable US tax treaty) on certain payments to any "foreign financial institution" (FFI), unless the FFI reports certain information about financial accounts held by US persons, or by other non-US entities in which US persons hold a substantial ownership interest.

In the course of preparing the proposed regulations, the IRS received extensive comments from more than 150 organizations, including virtually all of the major international trade associations of banks, fund managers, swap dealers, and custodians, as well as many foreign governments and individual financial institutions.

FFIs that do not participate in FATCA, i.e, non-participating FFIs (NPFFIs), will be subject to FATCA withholding on (i) US-source interest, dividends, rents, royalties, insurance premiums, and other fixed or determinable annual or periodical gains, profits and income; (ii) gross proceeds from the sale of US debt and equity securities; and (iii) foreign-source payments from other FFIs to the extent attributable to their US assets (each, a withholdable payment).

To avoid FATCA withholding, an FFI can become a participating FFI (PFFI) by entering into an agreement (an FFI agreement) with the IRS to (i) identify its US investors; (ii) identify investments by non-US entities in which US persons hold a substantial ownership interest; (iii) report certain information to the IRS regarding such investors; (vi) verify its ongoing compliance with its obligations pursuant to the FFI agreement; and (v) make the appropriate withholding on withholdable payments made to investors that do not provide the required information (recalcitrant holders) or that are themselves NPFFIs.

This alert summarizes some of the key implementation issues relevant to the asset management industry, including deadlines and the impact of non-compliance.

Complying with FATCA

For fund managers, a first step toward FATCA compliance would include an initial review of the fund structure in order to identify FFIs. This will likely include most non-US entities that make investments, since the proposed regulations define "FFI" broadly to include...