Press Room: Tax Release

July 29, 2013

FATCA Alert – Implementation Dates Extended Again

On July 12, 2013, IRS extended the implementation dates by six months for many of the withholding and account due diligence requirements under the Foreign Account Tax Compliance Act (FATCA) in Notice 2013-43. In light of this delay, those who haven’t done so already, and who may be affected by FATCA when it does become effective, should begin to assess its potential impact on their operations.

Background

In 2010, the U.S. Congress enacted FATCA to prevent tax evasion by U.S. taxpayers using non-U.S. financial accounts. To accomplish this, FATCA generally imposes a 30% withholding tax on non-U.S. entities with respect to U.S. source income and gross proceeds from the sale of property that can produce U.S. source income (such as U.S. corporate stock or debt) unless the non-U.S. entities disclose their U.S. ownership or are otherwise exempt from FATCA.

Effect on Alternative Investment Funds

The impact of FATCA on the world of investment funds is profound. All investment funds, including hedge, private equity and venture capital with U.S. investments will be subject to FATCA, either as a withholding agent, if the fund is organized in the U.S., or a “foreign financial institution” (FFI), if the fund is organized outside the U.S.

FATCA requires a broad range of investment entities to do the following:

  • Register with the IRS;
  • Review their investor base;
  • Gather documentation;
  • Conduct due diligence on their investors; and
  • Implement new tax information reporting and withholding procedures.

To further complicate matters, a number of countries (e.g., the UK, Ireland, Mexico) have entered into Intergovernmental Agreements (IGA) with the United States that, in effect, supersede the FATCA regulations. While some compliance procedures may vary under an applicable IGA, even under an IGA, FFI’s must still perform the onerous identification procedures to search for U.S. account holders.

Effect on Commercial Entities

Although financial institutions, including investment funds, may be the primary target of FATCA, multinational companies (MNC's) may also be affected, as follows:

  • Additional documentation may need to be collected from certain non-U.S. parties related to payments made as part of the treasury and accounts payable functions;
  • Entities within the MNC’s worldwide group may, in fact, meet the definition of an FFI and may be required to take affirmative steps to be compliant under FATCA; and
  • MNC's will need to verify whether the foreign banking or other financial relationships that they have within their global organization are with foreign financial institutions that are FATCA compliant.

Effect on Individuals

While FATCA does not directly apply to individuals, it can still affect them indirectly as investors. Thus a U.S. individual investor generally will have to provide an IRS Form W-9 with his taxpayer identification number to any fund in which he invests and an investor who is a non-U.S. individual generally will have to provide an updated Form W-8 BEN to the fund.