New US Withholding and Reporting Requirements of FATCA

From 1 January 2013, the Foreign Account Tax Compliance Act (FATCA) will require foreign financial institutions (FFIs) to enter into an agreement to provide the Inland Revenue Service (IRS) with information on US persons invested in accounts outside of the US and for certain non-US entities to provide information about substantial US owners.

To compel these entities to provide this information, FATCA will require the imposition of a 30% withholding tax on US source payments made to FFIs that do not enter into an agreement with the US Treasury.

The withholding tax will also apply to payments made to certain non-financial foreign entities that do not disclose substantial US owners. This new withholding tax applies to US source income, bank deposit interest and sales proceeds.

This new legislation will also affect non-US businesses with treasury operations that hold and derive income from US domiciled assets – from US Treasury bonds to real estate investment trusts (REITs) to private equity stakes to portfolios of listed shares.

Recommended action:

The US Treasury has been given broad authority to implement many aspects of these rules through the issuance of regulations, which we expect to see over the next 18 months. In advance of this guidance, we urge financial entities and corporate treasurers that hold US domiciled assets and investments to immediately assess their circumstances and capabilities against the known and expected requirements.


On 18 March 2010, President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act that included provisions of the Foreign Account Tax Compliance Act (FATCA), which are now Chapter 4 of the Internal Revenue Code.

Chapter 4 requires a wide range of non-US financial intermediaries – such as banks, brokers, investment vehicles such as hedge funds and private equity funds, and collateralised loan obligations (CLOs) and collateralised debt obligations (CDOs) – that hold US investments to obtain and report information pertaining to US accounts to the US Treasury. Even those intermediaries without US clients must comply or they will be liable for withholding on any US assets that they hold for themselves or their customers.

Chapter 4 is a reaction to high profile failures to prevent tax evasion using existing US information reporting systems, and was driven by a lack of confidence in existing customer identification and know your customer (KYC) rules.

Chapter 4 should accomplish its objectives because it financially compels non-US financial intermediaries to identify and report specified US account holders to the US Treasury. The penalties can be high for failing to comply, and should not be understated. The withholding tax applies not only to the US investments of US clients, but to all US investments held by the financial intermediary and its affiliates, including its own portfolio.

Figure 1. Scope of Foreign Account Tax Compliance (FATCA) provisions

Source: Deloitte


FATCA imposes a 30% withholding tax on ‘withholdable payments’, including gross proceeds, paid to:

  1. FFIs.
  2. Non-financial foreign entities (NFFEs).

FFIs are defined as any non-US entity that:

  • Accepts deposits.
  • Holds financial assets for the account of others.
  • Engages primarily in the business of investing or trading securities, commodities, partnerships, or any interests in such positions.

This is a very broad definition and includes not only entities that are normally recognised as financial institutions, such as banks, broker dealers and custodians, but also insurance companies, trust companies, pension plans, mutual funds, hedge funds and family investment vehicles.

The only exceptions are for:

  • FFIs that enter into agreements with the IRS to identify and report certain US persons.
  • NFFEs that certify they have no US owners or who disclose details of their US owners (potentially piercing the veil of incorporation).
  • Exempt entities such as governments (but not government agencies), international organisations, central banks and publicly traded NFFEs.

Operational and Reporting Obligations – for FFIs

The details of Chapter 4 are extensive and complex; however, the underlying premise is to penalise non-US financial intermediaries which do not agree to provide US account information to the US Treasury. These intermediaries are effectively compelled, by the threat of a withholding tax, to enter into information reporting agreements with the Treasury. They must then ensure their operations are conducted in compliance with the terms of these agreements, and, on an annual basis, provide information to the IRS for specified US accounts.

The obligations imposed by Chapter 4 include more than an agreement to provide annual reporting to the US Treasury. They also require that the intermediary obtain information on all its accounts – both US and non-US – and that it comply with any verification and due diligence requirements prescribed by the US Treasury. The intermediary must also comply with any US Treasury requests for additional information, and agree to obtain a waiver of any foreign privacy law, if necessary.

The due diligence that will be required to verify whether an account is US, or non-US, is unknown at this point. The US Treasury and IRS have issued conflicting statements as to whether existing customer identification and KYC rules will be sufficient for this purpose. The decisions made by the US Treasury in this regard may greatly alter the recordkeeping and account opening procedures of non-US financial intermediaries.

Importantly, intermediaries must verify both those accounts held directly and those held indirectly through collective investment vehicles and other specified entities. In such cases, information must be obtained to determine the indirect US ownership of accounts held through these entities.

An intermediary must also agree to withhold on an account holder who refuses to provide sufficient information for verification purposes or who does not provide a privacy waiver. Withholding would also apply to an account held by an unrelated non-US financial intermediary that has not entered into an agreement with the US Treasury. Thus, a system of withholding on non-compliant customers must also be implemented.

It should be noted that Chapter 4 applies an enterprise-wide approach using expanded affiliated group rules. Under these rules, all affiliates must comply with an agreement entered into by another member. Thus, a non-contracting member is not excused from reporting, and may cause a compliance failure for the affiliated group.

Operational and Reporting Obligations – for NFFEs

The operational obligations for NFFEs are more straightforward. Certain NFFEs will be subject to the 30% withholding tax unless the NFFE either certifies that it has no substantial US ownership or if the NFFE reports substantial US owners to the withholding agent.

For corporate treasurers who are not involved in the financial services industry, we recommend that treasurers of NFFEs collate and maintain sufficient documentation to comply with this FATCA disclosure requirement in advance of the FATCA effective date.

In addition to the reporting obligations in the receipts cycle, corporate treasurers must also be mindful of the need for FATCA compliance in the payments cycle. The new FATCA rules effectively turn NFFEs into withholding tax agents, and NFFEs must withhold the 30% tax from payments made to non-compliant NFFEs. With this in mind, treasurers should develop appropriate systems and processes to develop, maintain and disseminate the information necessary for compliance. FATCA compliance of an entity’s vendors and supply chain may have a knock-on effect on business operations, and treasurers should be mindful of this interdependency.

Preliminary Guidance: New Notice 2010-60

Notice 2010-60 was issued on 27 August 2010, and deals with limited aspects of the new FATCA rules. These include: exceptions for certain entities that fall under the definition of an FFI, and the requirements that will be imposed under the FFI agreement. This notice clarifies the defined grandfathered ‘obligations’ and is now closed for comments.

Under this notice, withholdable payments to FFIs will be subject to withholding unless:

  • The FFI is a ‘participating’ FFI (one that has entered into an FFI agreement).
  • The entity is exempted from FFI treatment.
  • The FFI is a ‘deemed-compliant FFI’ (exempt from withholding without entering into an FFI agreement).
  • The FFI is an entity that is treated as exempt from the requirements (governmental or international organisations and foreign central banks).

Entities exempted from FFI treatment include holding companies of non-financial institution businesses, a 24-month exclusion for foreign entities with inward investment in non-financial institution businesses, non-financial institution businesses in liquidation, reorganisation or bankruptcy, hedging and financial centres for non-financial institution groups, certain insurance companies and foreign retirement plans.

‘Deemed-compliant FFIs’ are those that co-operate with the withholding agent and which have direct or indirect account holders, all of whom are either individuals (e.g. a family trust settled by one person for the sole benefit of his or her children) or ‘excepted NFFEs’. The withholding agent must specifically identify each individual, obtaining documentation as if that individual were a new account holder of the withholding agent and report to the IRS any specified US person identified as a direct or indirect interest holder in the entity.

Notice 2010-60 also includes some guidance for entities that may need to enter into an FFI agreement: US branches of FFIs, controlled foreign corporations (CFCs) and foreign charitable organisations.

The notice gives some guidance on grandfathered obligations. The new rules are generally effective for payments made after 31 December 2012, but they do not require any amount to be deducted or withheld from any payment under any ‘obligation’ outstanding on 18 March 2012.

Recommended actions:

While the US Treasury has been granted broad authority in many areas of Chapter 4, and significant guidance is expected to be published over the next 18 months, time is short. The broad outlines have already been put in place by statute. Begin preparing by doing the following:

  • Ensure that both your organisation and withholding agents are in a position to react quickly.
  • Identify and structure your project team.
  • Reach out to your affiliates to ensure they are aware of the approaching change and are working to assess their capabilities.
  • Be prepared to analyse proposed guidance in view of your organisational capabilities and implement changes, if necessary.
  • Review your current client documentation (KYC) procedures.
  • Be ready to implement systems and processes in response to the final rules from the US Treasury.
  • Prepare a communication strategy about this change to your clients and other business partners.


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