Update on US Foreign Account Tax Compliance Act (FATCA)

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As reported in several recent risk notes, there is continuing concern about the introduction of the US Foreign Account Tax Compliance Act (FATCA).

FATCA added a new component to the U.S. tax withholding and information reporting regime.

The law effectively makes foreign financial institutions (FFIs) information gathering and withholding agents of the U.S. Internal Revenue Service (the IRS) by threatening an FFI’s own U.S. source income and gross proceeds of sale of U.S. securities with a 30% withholding tax. The 30% Withholding does not apply if the relevant FFI enters into an agreement with the IRS to report certain information in respect of financial accounts maintained by it which are held by U.S. persons (as well as certain non-U.S. entities which have a 10% U.S. owner), or complies with prescribed procedures to ensure that the FFI does not maintain any financial accounts held by such persons or entities. In addition, such an FFI may need to withhold on “passthru payments” it makes to other FFIs. The expansive definition of FFI provided by the law means that these changes are of concern not only to banks, but also to investment funds, hedge funds, private equity funds, securitization vehicles, and many other forms of financial intermediary…

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