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The Foreign Account Tax Compliance Act

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The Foreign Account Tax Compliance Act (FATCA) was enacted by the US Congress on 18 March 2010. FATCA provides the US Internal Revenue Service (IRS) with a new tool which strengthens the information and compliance reporting process used to identify US persons who have money invested outside of the US.

The aim of this US legislation is to ensure that US persons are ultimately taxed, by securing the participation of non American financial institutions to the FATCA program, whereby these institutions report identified US accounts to the IRS and withhold a 30% penalty on US source payments to undocumented US accounts and non participating Foreign Financial Institutions. For most Foreign Financial Institutions (FFIs), FATCA compliance is a significant challenge.

The statute delegated much of the implementation detail to the US Treasury Department and IRS. On 8 February 2012 those departments issued proposed regulations for FATCA implementation, clarifying a number of FATCA requirements, as well as a Joint Statement with the UK, Spain, Germany, France and Italy addressing an intergovernmental approach to implementing FATCA. While there is some good news, the challenge of FATCA implementation remains substantial for most FFIs.

The proposed regulations lay out the process for US account identification, information reporting, and withholding requirements for Foreign Financial Institutions (FFIs), other foreign entities, and US withholding agents. They address many, but not all, of the major items requiring further clarification following the three prior notices issued on FATCA.

Find out more about FATCA by visiting the FATCA section on our Global website.