On the 18 March 2010, President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act, which included provisions of the Foreign Account Tax Compliance Act (”FATCA”). The FATCA provisions, added as Chapter 4 of the U.S. Internal Revenue Code, require a wide-range of foreign financial intermediaries (”FFI”) which includes investment vehicles such as private equity funds that own U.S. investments to obtain and report information pertaining to U.S. accounts to the IRS. FFIs that do not have any U.S. clients, but hold U.S. investments, must also comply with the new reporting provisions.
The provisions of new Chapter 4 of the U.S. Internal Revenue Code financially compel, through the use of withholding taxes, FFIs to identify and report specified U.S. account holders to U.S. Treasury. The withholding tax applies not only to the U.S. investments of U.S. clients of the FFI, but to all U.S. investments held by the FFI and its affiliates, including its own portfolio.
The details of Chapter 4 are extensive and complex. To avoid 30% withholding tax FFIs must enter into information reporting agreements with U.S. Treasury, conduct their operations in compliance with the terms of these agreements and, on an annual basis, provide information in a detailed account statement to the IRS for specified U.S. accounts.
The obligations imposed by Chapter 4 include more than an agreement with and annual reporting to U.S. Treasury. They also require that the FFI obtain information on all accounts owned by U.S.-owned foreign entities, and that it comply with any verification and due diligence requirements prescribed by U.S. Treasury. The FFI must also comply with any U.S. 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 U.S., or non-U.S., is unknown at this point.
Importantly, FFIs 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 U.S. ownership of accounts held through these entities.
Significant guidance, include regulations, from U.S. Treasury is expected over the course of the next 12 months.