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Tax Law

FATCA Provisions in the HIRE Act (H.R. 2847)

New Reporting Requirements, Penalties for Foreign Financial Institutions, Account Holders

H.R. 2847, the Hiring Incentives to Restore Employment (HIRE) Act, signed into law on March 18th, mandates 30 percent tax withholding on payments to foreign financial institutions (FFIs) that fail to comply with prescribed disclosure requirements about U.S.-based account holders. Provisions from the Foreign Account Tax Compliance Act (FATCA), conceived in 2009, are included in H.R. 2847 in order to help pay for $13 billion in HIRE Act employment incentives.

FFIs subject to the 30 percent tax withholding requirement are broadly defined, and generally apply to payments after December 31, 2012. To avoid the withholding requirement, FFIs must identify U.S. account assets and ownership to the IRS. Foreign corporations must identify 10 percent owners.

Separately, other FATCA provisions - with different effective dates - also impose tax penalties on: understatements related to undisclosed foreign assets (40 percent); U.S. taxpayers who do not report on their annual returns offshore account assets that exceed $50,000; and bearer bonds sold to offshore investors.

In addition, FATCA elements include, but are not limited to: failure-to-file penalties on certain foreign trust related information returns; a filing requirement for passive foreign investment company shareholders; a statute of limitations period extension to six years for omissions that exceed $5,000 and 25 percent of income earned from offshore assets; and an electronic withholding tax filing requirement.