FATCA Deadline Quickly Approaches
On July 1, 2014, the Foreign Accounts Tax Compliance Act (“FATCA”) will come into effect. This legislation is included in the 2010 Hiring Incentives to Restore Employment (HIRE) Act of 2010 with the purpose of preventing US taxpayers from evading taxes through offshore investments or non-US financial institutions.
In order to achieve this goal, FATCA requires foreign financial institutions (“FFIs”) to identify accounts held directly or indirectly by US persons, and to report to the IRS specific account information. This information includes: the name and address of the account holder, the US Taxpayers Identification Number, account number, and account balances. Non-US entities that are substantially owned by a US person are also required to report the relevant information on the US owner. Any financial institutions that are non-compliant are subject to a 30% US withholding tax on US source income payments.
There are several ways in which FATCA is implemented. In one instance, foreign governments can enter into Intergovernmental Agreements (“IGAs”) with the US or Treasury Departments. Approximately 70 countries have entered into, or have “in substance,” entered into IGAs. These agreements fall into two categories: Model 1 IGA and Model 2 IGA. Under the Model 1 IGA, foreign financial institutions report directly to their local authorities who in turn disclose the relevant information to the IRS. Under the Model 2 IGA, foreign financial institutions are required to enter into an FFI agreement and to then report directly to the IRS. An alternative means through which financial institutions can adhere to FATCA is by registering on the IRS portal and receiving a Global Intermediary Identification Number (“GIIN”). On June 2, 2014 the IRS released a list of 77,000 financial institutions that had registered on the portal.
Since FATCA poses a gross-up risk to transactions under several different types of Master Agreements, ISDA developed the 2012 FATCA Protocol. This Protocol provides an efficient means through which parties can amend ISDAs to include language that avoids the gross-up risk resulting from FATCA implementation.