FATCA: The Global Financial System Must Now Implement a New U.S. Reporting and Withholding System for Foreign Account Tax Compliance, Which Will Create Significant New Exposures – Managing this Risk (Part I)

66 Pages Posted: 19 Jul 2010  

Dean Marsan

Charles Schwab and Co., Inc.

Date Written: July 1, 2010

Abstract

This article will be a separated into a three-part series that will appear in the July, August and September editions of Taxes – The Tax Magazine. The article will address the new reporting and withholding regime imposed upon foreign financial institutions and nonfinancial foreign entities, its impact on banks, insurance companies, multinational corporations and investment and mutual funds, as well the new reporting requirements for uncertain tax positions for U.S. and foreign corporations including life, property and casualty insurance companies and new tax compliance for individuals with foreign assets. In addition, the article will discuss changes to the tax treatment of substitute dividends and dividend equivalent payments received by foreign persons, the repeal of certain foreign exceptions to the registered bond provisions, IRS U.S. withholding tax and information reporting examinations, liabilities for U.S. withholding tax, interest and penalties, U.S. account exposures, prophylactic planning and action steps, corporate governance and compliance to manage the U.S. account risk.

Part I discusses the purposes, goals, legislative history and mechanics of FATCA, tax and securities law exposures, proposed reporting requirements for uncertain tax positions, the impact of the law on umbrella structures and options for foreign entities, withholdable payments to foreign financial institutions, definition of withholding agent and withholdable payment, the general requirements to avoid FATCA withholding, Coded Sec. 1471(b) agreement implementation (and termination) issues, gross-up provision concerns, waiver of foreign law, confidentiality, withholding on recalcitrant account holders and noncompliant FFIs and electing out using a hybrid FFI agreement, addressing failures to withhold FATCA taxes, issues on passthrough payments for foreign banks, insurance companies and multinationals and FATCA’s impact on an FFIs “expanded affiliated group,” due diligence and KYC requirements under FATCA, bypassing the Code Sec. 1471(b) agreement for FFIs with no U.S. accounts, the viability of the full 1099 reporting option, exceptions for certain payments, the FFI annual reporting requirement and FATCA’s impact on existing QIs.

Keywords: FATCA, HIRE Act, Foreign Financial Institution, Non-Finanical Foreign Entity, Code Sections 1471-1474, U.S. Account, Substantial U.S. Owner, AML, Tax Penalty, UTP, Uncertain Tax Position, FIN 48, FAS 5, investment fund, mutual fund, insurance company, withholdable payment, tax treaty, passthru

JEL Classification: E62, H21, H26

Suggested Citation

Marsan, Dean, FATCA: The Global Financial System Must Now Implement a New U.S. Reporting and Withholding System for Foreign Account Tax Compliance, Which Will Create Significant New Exposures – Managing this Risk (Part I) (July 1, 2010). Taxes – The Tax Magazine, Vol. 88, No. 7, pp. 27-92, 2010. Available at SSRN: https://ssrn.com/abstract=1645527

Dean Marsan (Contact Author)

Charles Schwab and Co., Inc. ( email )

CO
United States
917.669.9422 (Phone)

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