On 28 March 2010, President Obama signed the Foreign Account Tax Compliance Act into law. This legislation, enacted to prevent offshore tax abuses by U.S. persons, includes a new withholding regime that is designed to achieve intent by imposing a 30 percent withholding tax on certain foreign entities that refuse to disclose the identities of these U.S. persons.
Congress deferred much of the implementation of this new regime to the Department of the Treasury. The implications of the new withholding regime are wide-ranging for financial institutions, investment entities, and many other organisations that operate on a global basis. This issue discusses these implications and advises organisations of the appropriate actions.
Foreign banks and other financial institutions must reach an agreement with the IRS and identify U.S. accounts or they could subject their owners to a 30 percent withholding tax.
The definition of affected foreign financial institutions (FFIs) is broad and wide-ranging, and includes entities that manage investments, including alternative investment entities and insurance companies.
Non-financial foreign entities (NFFEs) will be required to disclose whether they have any 10 percent U.S. owners. NFFEs that fail to document the existence or non-existence of US owners may be subject to the 30 percent withholding tax regime.