The US Treasury Department has announced compliance with the Foreign Account Tax Compliance Act (FATCA) has been delayed by six months, after the US Department of the Treasury and the Internal Revenue Service (IRS) agreed a six-month extension to the withholding and account due diligence requirements. The aim is to allow more time to complete agreements with foreign jurisdictions.

Foreign banks, insurance companies, investment funds and other financial institutions now need to be FATCA-compliant for new customer on-boarding starting 1 July 2014, according to a statement issued on July 12. Postponing the effective date will give financial institutions more time to comply and allow US regulatory bodies to issue clarifications on a number of issues.

FATCA is designed to provide the United States' Internal Revenue Service (IRS) with the capability to detect US tax evaders concealing their assets in foreign accounts and investments. The onus is placed primarily on foreign financial institutions that need to perform far more extensive due diligence on their clients and forward relevant information to the IRS.

Specifically, all accounts above US$50,000 must be reviewed for U.S. tax status. Additionally, certain entities must be screened for U.S. shareholders with beneficial ownership of 10% or above. Existing anti-money laundering regulations typically require disclosure of 25% ownership or more. Non-compliance on part of foreign financial institutions is severe, entailing a 30% withholding tax applied to payments to the organization by U.S. based or foreign FATCA-compliant entities.

A source of uncertainty has been so-called intergovernmental agreements (IGAs) negotiated between the U.S. and other countries. IGAs seek to address country-specific legal barriers such as data privacy regulations that put financial institutions in a bind when they try to comply with FATCA.