Regulation update: FATCA

The Foreign Account Tax Compliance Act is the second US-specific law in the bulk of new regulation. At its core, FATCA proposes a 30% withholding tax on all withholdable payments of persons and entities that fail to disclose US account holders to the Internal Revenue Service (IRS). This means that foreign financial institutions (FFIs) will have to either seal their US operations off into separate incorporated entities or will have to erase critical accounts from their balance sheets.

FATCA's most controversial feature is the necessary disclosure of LPs under the act, which could breach data protection laws in some countries.

Compliance with one law that causes non-compliance with another means that FATCA will almost undoubtedly increase administrative costs for funds.

The German BVK portrays the tax law very objectively as "an obligatory duty for foreign financial intermediaries", while others consider it a supranational information gathering exercise.

Koos Teule, director of investment relations at Gilde Buyout Partners, deems FATCA's reach intolerable: "FATCA sounds like a nightmare. I don't think it's going to be effective." But not everybody is left outraged by the new administrative burden. Isabel Rodriguez, partner as SJ Berwin in Madrid and member of ASCRI's legal and fiscal committee, thinks the reaction is exaggerated: "To be honest, every time a new regulation comes into force we all worry a lot ­ but in my experience, as soon as we understand the regulation and the procedures that come with it, people adjust, fulfil their obligations and go ahead with business."

Recently, France, Germany, Italy, Spain and the UK have committed to an intergovernmental effort to implement FATCA. This approach was primarily driven by the possible violation of disclosure and data protection laws. The amended regulation foresees reporting to the regional European authorities as opposed to the IRS, and reciprocal automatic exchange in the scope of existing bilateral tax agreements.

KEY FACTS

• Aims to counter offshore tax evasion originating in the US, and increase tax revenue.
• Imposes 30% withholding tax on all withholdable payments in case of non-compliance.
• Passed in March 2010 and due to come into effect on 1 January, 2013:
• New account due diligence procedures for FFIs will be effective from 1 July, 2013.
• Distinguishes between foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs).

• DLA Piper identifies three categories of FFIs:
• Entities accepting deposits in the ordinary course of a financial business;
• Entities holding [financial] assets for the account of others;
• Entities engaging in investment, reinvestment or trading activities.

• In addition DLA Piper indentifies a fourth category:
• US-owned foreign investment vehicles that have to report to the IRS, disregarding other classifications.

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