US Treasury backs down on FATCA
Monday July 18 2011 | 10:37 PM

The US government has postponed implementation of the Foreign Account Tax Compliance Act (FATCA).

Enacted last year as part of the HIRE Act, FATCA requires all foreign banks (and any other type of financial institution) to record all payments of interest or other income to US persons, and report them to the US Internal Revenue Service. The aim is, of course, to ensure that US citizens pay tax on all foreign income.

Any bank or investment fund that refused to comply would face a 30 per cent withholding tax on interest payments, dividends or other investment income earned in the USA. Moreover, foreign banks would also have to agree to impose the withholding tax on other foreign banks on the IRS's behalf - meaning that payments between non-US institutions would be subject to US tax.

The FATCA reporting obligations were scheduled to come into force in January 2013. However, the US government has come under heavy pressure from foreign governments to water down its provisions, because of the compliance burden they would place on financial institutions. Many of the latter have said they would refuse deal with American clients, or would disinvest in American securities, rather than comply with FATCA. In April, Algirdas Semeta, head of the European Commission's tax policy office, wrote to the US Treasury criticising FATCA's "onerous" disclosure provisions for European banks.

American taxpayers too have objected to the new rules. A non-profit campaigning body called American Citizens Abroad, based in Switzerland, last week urged expat Americans to lobby Congress against FATCA, which it said could have a "devastating impact" on US citizens and businesses overseas. It warned that FATCA is already causing foreign banks and investment funds to turn away US clients.

Late last week, the US Treasury caved in and issued a notice putting the schedule back by a year. The reporting requirements will begin in 2014, not 2013. Withholding tax on dividends and interest will also be delayed until January 2014, while withholding tax on gross proceeds of asset disposals will be postponed until January 2015.

Announcing the postponement, IRS Commissioner Doug Shulman admitted that implementing FATCA was "a major undertaking for financial institutions."

However, FATCA's special due diligence requirements (which require banks to identify certain "high-risk" US accounts worth more than $500,000) will begin in 2013. And foreign banks will have to notify the IRS by June 2013 whether they intend to comply with the FATCA regime. Any who do not will be assumed to be non-compliant and will be subject to the withholding tax.