On 18 March the Foreign Account Tax Compliance Act (FATCA) was enacted. This impacts the activities of banks, investment companies and ordinary companies worldwide. According to FATCA, a 30% tax must be withheld from US-source interest, dividends and any other US-source income if the financial institution or beneficiary fails to comply with the requirements specified in FATCA.
According to the summary of the Unites States House Committee of Ways and Means, the purpose of FATCA is to force foreign financial institutions to cooperate with the Internal Revenue Service (IRS) on identification of US tax residents. Specifically, the payer is required to calculate and withhold tax if the beneficiary is a foreign financial institution that has not entered into a cooperation agreement with the IRS for collection and disclosure of information required to identify account holders who are US taxpayers and for imposing tax. Moreover, it is not important whether the payer is a US resident or not – every person who pays US-source interest, dividends, rent, compensation or who transfers any other income originating in the US has to comply with the requirements arising from FATCA. In addition to the payer, in certain cases a financial institution will also have to perform the withholding obligation; also, in specific events the financial institution is obliged to terminate an agreement made with the account holder. According to FATCA, the payer must also withhold taxes when the beneficiary is a foreign company; however, no withholding need be performed if certification is provided that a foreign company is not substantially in US ownership or when information required regarding substantial US ownership is delivered.
Although the requirements arising from FATCA will, with certain exceptions, come into force from the beginning of 2013, we recommend analysing the possible impact and starting necessary preparations even now, as FATCA is a relatively complicated regulation and application of the requirements contained in the regulation may prove to be quite intricate. Notably, implementation of FATCA may raise conflicts with local law. For example, a credit institution in Estonia may ordinarily disclose a client’s data only with written consent of the client. Additionally, termination of an agreement with an account holder may prove difficult; the same applies to identifying substantial US ownership of a company. The aim to comply with the requirements arising from FATCA may also entail the need to review current client agreements, procedures for entry into agreements as well as IT systems, which may need to be modified due to introduction of the withholding obligation.
In conclusion, FATCA does enable the IRS to efficiently combat tax evasion, but on the other hand implementation of FATCA by financial institutions involves quite a number of problems. Basically, a financial institution may choose not to comply with the requirements arising from FATCA, but then it will need to take into account that 30% will be withheld from US-source payments made to its clients in certain cases.
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US “invites” foreign financial institutions to cooperate
On 18 March the Foreign Account Tax Compliance Act (FATCA) was enacted. This impacts the activities of banks, investment companies and ordinary companies worldwide. According to FATCA, a 30% tax must be withheld from US-source interest, dividends and any other US-source income if the financial institution or beneficiary fails to comply with the requirements specified in FATCA.
According to the summary of the Unites States House Committee of Ways and Means, the purpose of FATCA is to force foreign financial institutions to cooperate with the Internal Revenue Service (IRS) on identification of US tax residents. Specifically, the payer is required to calculate and withhold tax if the beneficiary is a foreign financial institution that has not entered into a cooperation agreement with the IRS for collection and disclosure of information required to identify account holders who are US taxpayers and for imposing tax. Moreover, it is not important whether the payer is a US resident or not – every person who pays US-source interest, dividends, rent, compensation or who transfers any other income originating in the US has to comply with the requirements arising from FATCA. In addition to the payer, in certain cases a financial institution will also have to perform the withholding obligation; also, in specific events the financial institution is obliged to terminate an agreement made with the account holder. According to FATCA, the payer must also withhold taxes when the beneficiary is a foreign company; however, no withholding need be performed if certification is provided that a foreign company is not substantially in US ownership or when information required regarding substantial US ownership is delivered.
Although the requirements arising from FATCA will, with certain exceptions, come into force from the beginning of 2013, we recommend analysing the possible impact and starting necessary preparations even now, as FATCA is a relatively complicated regulation and application of the requirements contained in the regulation may prove to be quite intricate. Notably, implementation of FATCA may raise conflicts with local law. For example, a credit institution in Estonia may ordinarily disclose a client’s data only with written consent of the client. Additionally, termination of an agreement with an account holder may prove difficult; the same applies to identifying substantial US ownership of a company. The aim to comply with the requirements arising from FATCA may also entail the need to review current client agreements, procedures for entry into agreements as well as IT systems, which may need to be modified due to introduction of the withholding obligation.
In conclusion, FATCA does enable the IRS to efficiently combat tax evasion, but on the other hand implementation of FATCA by financial institutions involves quite a number of problems. Basically, a financial institution may choose not to comply with the requirements arising from FATCA, but then it will need to take into account that 30% will be withheld from US-source payments made to its clients in certain cases.