US Foreign Account Tax Compliance Act (FATCA) provisions

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On 27 August 2010, the IRS issued IRS Notice 2010-60 which provides guidance on the so-called Foreign Account Tax Compliance (“FATCA”) provisions within the Hiring Incentives to Restore Employment (“HIRE”) Act of 2010.


These rules are designed to prevent US persons from evading US tax by holding income-producing assets through accounts at foreign (i.e. non–US) financial institutions (“FFIs”) or through other foreign entities (non-financial foreign entities, or “NFFEs”).


Although the planned implementation date is not until 1 January 2013, significant planning may be required in advance.


The provisions will impose a withholding of US tax at 30% upon so-called “Withholdable Payments” made to FFIs or to NFFEs unless the FFIs enter into agreements (“FFI Agreements”) to identify and report information to the IRS about their “US accounts” (e.g. US persons who invest in their funds) or the NFFEs provide information about their “substantial US owners” (i.e. US persons who directly or indirectly control more than 10% of a foreign company).

Withholdable Payments are defined broadly and include interest (including original issue discounts), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, periodical gains, profits and other income from sources within the US, and any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the US. Products previously exempt from withholding tax, such as total return swaps or securities lending payments referenced to US securities, will qualify as US source.

The withholding relates to all such income/proceeds received by the FFI/NFFE whether owned directly or indirectly by the US persons or otherwise.
The provisions potentially apply to all funds and intermediaries (including platforms, brokers and IFAs) that may be in receipt of US source income or proceeds.
There are some serious concerns as to how these rules will operate in practice and significant changes to systems may be required to ensure compliance. Identification of customers becomes considerably more burdensome. The burden of proof is with the FFI/NFFE; if the withholding tax is not to be imposed the FFI/NFFE must prove that it has no US customers/substantial US owners.

FFIs must obtain a waiver from each account holder so that they can report the required information to the IRS. If a customer refuses the waiver request, the FFI will be required to close the customer’s account or abstain from entering into a relationship with the US person.

For funds, there are some even more fundamental issues. The identity of beneficial ownership of funds is often not transparent to the fund/fund manager since distribution is carried out through other intermediaries (e.g. IFAs, fund of funds, private banks, fund platforms) that take responsibility for identifying the client but are not obliged (and would not wish) to disclose the identity of their client to the fund/fund manager. In order to comply with their FATCA reporting obligation, the fund manager will either have to become aware of the beneficial owners (uncommercial for the distribution channel) or rely upon all of its intermediaries to enter into FFI Agreements with the IRS (probably impractical).

Without full compliance (or disclosure of beneficial owners) through a fund’s entire distribution network, the fund will suffer 30% tax on income and gross proceeds from US securities.

Those funds who are likely to continue to have US investors and to hold US investments will need to understand the detail of their obligations in entering into FFI Agreements. They will need to assess their ability to satisfy the IRS’s information requirements given their current systems, processes and procedures and, in particular, plan to enhance their processes for identifying US persons and for reporting the relevant information. This is likely to be extremely challenging for a number of reasons, not leased be caused the definition of US persons for the purpose of FATCA is both broad and complex.

In the extreme, funds may consider it appropriate to restructure their business by, for example, altering their distribution channels or divesting themselves of US investments.


The rules are extremely complex and the representative bodies, e.g. EFAMA (the European Fund and Asset Management Association), IMA and AIMA, are making representations to reduce the compliance burden and for critical relaxations for the fund industry. 

16 November 2010 

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About Throgmorton: Throgmorton is one of the leading companies specialising in the provision of financial and administrative outsourcing in the UK SME financial services sector.

The information in this notice is intended for general guidance only. Throgmorton does not accept any responsibility for losses incurred to any person acting or refraining to act as a result of the information in this notice. Advice should be taken in the context of specific circumstances