On March 18, 2010, the Hiring Incentives to Restore Employment (HIRE) Act of 2010 was enacted into law. The Act added a new chapter 4 (sections 1471 – 1474) to the Internal Revenue Code. Chapter 4 expands the information reporting requirements imposed on foreign financial institutions (FFIs). These rules are commonly referred to as the Foreign Account Tax Compliance Act rules or “FATCA.” The FATCA provisions impose a 30 percent withholding tax on payments to an FFI of U.S. source interest, dividends, rents, salaries, or gross proceeds from the sale of U.S. assets. The tax can be avoided, but only if the FFI enters into an agreement with the IRS to comply with information reporting requirements with respect to U.S. accounts and the FFI agrees to withhold on certain payments to non-participating FFIs and individual account holders.
FATCA is a key component of the federal government’s push for heightened tax compliance among U.S. taxpayers with foreign accounts and assets. FATCA was implemented to ensure there the U.S. government has the necessary tools to efficiently determine the ownership of U.S. assets in foreign accounts. On February 8, 2012, the IRS issued proposed regulations to implement the new law. The proposed regulations are nearly 400 pages long and include substantial modifications to the preliminary IRS guidance on FATCA, as well as the draft FFI agreement to be finalized with the appropriate reporting forms later in the year. FATCA is scheduled to take effect January 1, 2013.
