What is FATCA?
The Foreign Account Tax Compliance Act (FATCA) is a US law aimed at foreign financial institutions (FFIs) and other financial intermediaries to prevent tax evasion by US citizens and residents through use of offshore accounts. The FATCA provisions were included in the HIRE Act, which was signed into US law on 18 March 2010.
FATCA will have a far-reaching impact on US-based companies as well as foreign companies with US assets or clients. Under the new provisions, a FFI may enter into an agreement with US tax authorities (a.k.a. the Internal Revenue Service, or IRS) requiring it, among other things, to report information on the FFI's US accounts. A FFI that enters into such an agreement becomes a "participating FFI."
If a FFI does not enter into an agreement with the IRS, all relevant US-sourced payments, such as dividends and interest paid by US corporations, will be subject to a 30% withholding tax. The same 30% withholding tax will also apply to gross sale proceeds from the sale of relevant US property.
All FFIs must comply with FATCA or be subject to withholding. Given the significant lead times large companies may need to comply with FATCA requirements — particularly for IT system changes — financial leaders are strongly encouraged to act now.
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