FATCA – What Non-U.S. Financial Institutions Should Do Now

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The Foreign Account Tax Compliance Act (“FATCA”) has been the talk of the financial services industry since it was enacted as part of the Hiring Incentives to Restore Employment (“HIRE”) Act on 18 March 2010. FATCA imposes substantial new reporting and withholding obligations on non-U.S. financial institutions (including banks and trust companies). Initially, much of the industry chatter surrounding FATCA involved threats from non-U.S. financial institutions to close their doors to U.S. clients. However, once the scope of FATCA became clearer, non-U.S. financial institutions realized that even this drastic step would not extricate them from FATCA’s draconian reporting and withholding regime because the reporting/withholding obligations apply to investments in U.S. securities made on behalf of clients – irrespective of whether those clients are U.S. persons.

Practically, FATCA only offers non-U.S. financial institutions two choices – 1) implement costly U.S. style reporting and account due diligence on behalf of a foreign revenue agency, or 2) cease offering U.S. securities to clients. How many non-U.S. financial institutions will choose the latter option remains to be seen. Though many in the U.S. Government probably failed to fully appreciate the issue, Congress and the White House in fact gambled with the U.S. financial markets in enacting FATCA.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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