US legislators adopted the Foreign Account Tax Compliance Act (the "FATCA") on 18 March 2010. This act will enter into force on 1 January 2013 and aims to prevent tax evasion by US taxpayers. To comply with the FATCA, foreign financial institutions are obliged to enter into an agreement with the IRS. Under this agreement, foreign financial institutions will be obliged to (i) undertake certain customer due diligence procedures and (ii) report annually to the IRS regarding the accounts of their US customers. If account holders do not comply with the FATCA requirements, the foreign financial institutions are obliged to withhold and then pay to the IRS 30 percent of any payments of US source income. Although the FATCA was enacted in 2010, many details of the new reporting and withholding requirements pertaining to foreign financial institutions still have to be developed through US Treasury regulations. These regulations are expected to be proposed in December 2011.
The FATCA requirements could impose a significant compliance burden on European financial institutions active in the US. The goals the FATCA pursues are, however, partly similar to those of the EU Savings Tax Directive, which provides for an exchange of information between tax authorities of EU member states. The Council of the European Commission is currently exploring how the FATCA requirements regarding the exchange of customer details relate to the EU Privacy Directive.