The new FATCA rules will affect financial services organisations, and doing business with the US.

US legislation has been introduced to further combat perceived tax avoidance in the form of the Foreign Account Tax Compliance Act (FATCA). The rules have significant implications for financial services organisations in particular, including fund managers, as well as imposing a significant compliance burden on doing business with the US.

Withholding taxes

  • A 30% withholding tax would be imposed on 'witholdable payments' made after 31 December 2012 to non- US 'financial institutions' and other entities unless the non-US institution itself enters into an agreement with the IRS to disclose all US account holders and to report annually with detailed relevant information including account ownership, balances and transactions.
  • The definition of a 'financial institution' is broad and includes any entity that is engaged in 'the business of holding financial assets for the account of others, and any entity engaged primarily in the business of investing or trading in securities'. So, subject to exemptions, banks, insurers, private equity companies, hedge funds and asset managers are all likely to be caught by the rules.
  • A non-US entity that is not a financial institution is also subject to 30% withholding tax on witholdable payments unless it identifies its 'substantial United States owners' or certifies to the contrary.
  • Where a shareholder cannot be identified, the 30% withholding tax will be imposed on the portion of the witholdable payment relating to the unknown shareholder. This may be a significant issue for co-investment vehicles investing in the US.
  • The definition of 'witholdable payments' is broad and encompasses not only the ordinary categories of US source investment income, i.e. interest, dividends, annuities and premiums, but also gross proceeds from the sale or disposition of income-generating US property and also payments in respect of derivative contracts that are based on underlying US dividend payments (which will be re-characterised as US source dividends.)
  • The FATCA rules are intended to override reduced treaty rates unless an agreement to disclose to the IRS is entered into.

Other requirements

  • US individuals and entities will be required to report offshore accounts with values of USD 50,000 or more on their tax returns. These requirements are in addition to the current US Report of Foreign Bank and Financial Account Regime (FBAR).
  • The FATCA rules as enacted will represent a significant compliance burden requiring extensive customer due diligence for many UK financial institutions in order to comply, which may not be cost effective for many organisation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.