Foreign Acoount Tax Compliance Act (FATCA) and Related HIRE Act Provisions

The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 as part of the Hiring Incentives to Restore Employment Act (HIRE) [111 P.L. 147] in order to help fight tax evasion by U.S. taxpayers with foreign accounts. FATCA generally applies to payments by foreign financial institutions (F.F.I.s) with respect to specified U.S. accounts that are made after December 31, 2012. The provisions (which constitute new chapter 4 [I.R.C. §§ 1471 - 1474] of the I.R.C.) expand the information reporting requirements imposed on F.F.I.s and include some withholding tax rules as well. In August of 2010, the I.R.S. issued preliminary guidance on the FATCA reporting requirements. [2010-37 I.R.B. 329, Notice 2010-60]

FATCA generally applies to payments made after December 31, 2012. Section 501(d)(2) provides that any payment made pursuant to any obligation outstanding on March 18, 2012 (or any gross proceeds from the disposition of such an obligation) will not be subject to withholding under chapter 4. [2010-37 I.R.B. 329, Notice 2010-60)] Treasury regulations will be issued providing that the term "obligation" for purposes of the Act means any legal agreement that produces or could produce withholdable payment, however an obligation for this purpose does not include any instrument treated as equity for U.S. tax purposes or any legal agreement that lacks a definitive expiration or term.

F.F.I.'s that have entered into a Qualified Intermediary (Q.I.) with the I.R.S. must meet the requirements of the FATCA rules in addition to any other requirements imposed under the Q.I. (A Q.I. is a F.F.I. or a foreign clearing organization that has entered into a withholding and reporting agreement (a "Q.I. agreement") with the I.R.S.) A F.F.I. that becomes a Q.I. does not have to provide beneficial ownership information for its customers to a U.S. financial institution to establish the customer's eligibility for an exemption from U.S. withholding tax-U.S. withholding agents can rely on a Q.I.'s Internal Revenue Service Form W-8IMY alone. By contrast, nonqualified intermediaries must provide a Service Form W-8IMY to a U.S. withholding agent and forward with that document Service Forms W-8 or W-9 or other specified documentation for each beneficial owner. As a technical matter, all Q.I.'s are withholding agents for purposes of the nonresident withholding and reporting rules, and payors (who are required to withhold and report) for purposes of the backup withholding and Internal Revenue Service Form 1099 information reporting rules. (Note that under the Q.I. agreement, a Q.I. may choose not to assume primary responsibility for these, in which case it must provide the appropriate Service Forms must be provided to a U.S. withholding agent/payor).

I.R.C.  § 1471(a) requires a withholding agent to deduct and withhold a tax equal to 30% of the amount of any withholdable payment to an F.F.I. that does not meet the requirements of I.R.C.  § 1471(b). To meet the requirements of that section, an F.F.I. agrees to undertake certain due diligence, reporting, and withholding responsibilities,...

 

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