The Foreign Account Tax Compliance Act (FATCA) was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act on March 18, 2010. FATCA creates a new information reporting and withholding regime for payments made to certain Foreign Financial Institutions (FFIs) and other foreign entities.
FATCA is intended to increase transparency for the IRS with respect to US persons that may be investing and earning US income through non-US institutions. While the primary goal of FATCA is to gain information about US persons, FATCA imposes tax withholding where the applicable documentation and reporting requirements are not met.
The FATCA rules generally become effective with respect to certain payments made on or after January 1, 2013.
FATCA generally applies to two defined payment types:
- Withholdable Payments
- Pass-thru Payments
A withholdable payment is a payment of either: US source income that is fixed or determinable, annual or periodical (FDAP) income; or gross proceeds from the sale or other disposition (including redemption) of property that can produce US source interest or dividend income.
The definition of a pass-thru payment includes any withholdable payment and any other payment to the extent it is attributable to a withholdable payment.
While FATCA affects US withholding agents and US multinational companies, FFIs will most likely see the biggest change. A withholding agent is required to withhold 30% on a withholdable payment made to a FFI or to a Non-Financial Foreign Entity (NFFE), unless the FFI or NFFE meets certain requirements.
In addition, a FFI must withhold 30% on any pass-thru payment it makes to a recalcitrant account holder as well as to payments it makes to another FFI unless that FFI meets certain requirements.