On July 1, 2014, FATCA (Foreign Account Tax Compliance Act) will go into effect. As a consequence, foreign entities that receive payments or allocations of certain U.S.-source income generally will be subject to a new 30 percent U.S. withholding tax on such income unless such foreign entities comply with FATCA or otherwise are exempt from FATCA.

Last package of regulations

The U.S. Department of the Treasury and Internal Revenue Service (IRS) last week released the last substantial package of regulations necessary to implement the Foreign Account Tax Compliance Act (FATCA). In pursuit of its objective to detect and deter offshore tax evasion, FATCA seeks to obtain information on accounts held by US taxpayers in other countries. It requires US financial institutions to withhold a portion of certain payments made to certain foreign financial institutions (FFIs) that do not agree to identify and report information on US account holders.

These regulations made additions and clarifications to previously issued FATCA regulations and provide guidance to coordinate FATCA rules with pre existing due diligence, reporting, and withholding requirements under other provisions of the Internal Revenue Code (Code). 

No further extensions

Despite numerous prior extensions, the U.S. Internal Revenue Service (IRS) has stated that the July 1st effective date will not be extended further. Accordingly, time is running out for foreign entities to determine whether FATCA is applicable and, if so, to take steps to become FATCA-compliant by the time FATCA becomes effective.

World-wide agreements

Agreements for compliance with FATCA are being signed with governments world-wide; the latest agreements include those with Canada and Finland. However, political tensions could escalate if it becomes widely known that under U.S. diplomatic agreements targeting tax evasion, U.S. financial firms must share information on foreign-born U.S. residents with foreign governments.