On February 8, 2012, the Internal Revenue Service ("IRS") issued much-awaited proposed regulations (the "Proposed Regulations") that interpret sections of the Internal Revenue Code (the "Code") that were added on March 18, 2010 as part of the Hiring Incentives to Restore Employment Act (the "HIRE Act"). In general, these provisions, aimed at combatting offshore tax evasion, impose a new 30% U.S. withholding tax on certain payments made by U.S. persons to (i) non-FATCA-compliant foreign financial institutions ("FFIs") and (ii) certain non-financial foreign entities ("NFFEs"). To avoid withholding under FATCA, an FFI must enter into an agreement with the IRS whereby it agrees to identify and report on U.S.-owned accounts and to withhold on "withholdable payments" that it makes to both non-compliant FFIs and individuals, and an NFFE must report to the IRS certain information regarding its substantial U.S. owners (generally, U.S. persons owning an equity interest of greater than 10%). "Withholdable payments" consist of both "traditional" fixed or determinable annual or periodical (FDAP) income – such as interest and dividends – and gross proceeds from the sale of property producing interest or dividends. Thus, the new withholding regime is far broader than the withholding regime that is currently in place that requires 30% withholding on U.S.-source dividends paid to a nonresident alien, for example, but not on gross proceeds derived from the sale of the underlying stock. The government does not view FATCA withholding as a new tax, but for those persons who are unwilling to identifythemselves, the withholding would act as such.
The Proposed Regulations, in response to practitioner and industry concerns, delay the full implementation of the withholding and reporting regime. One aspect of this delay is the expansion of the scope of "grandfathered" obligations to those obligations that are outstanding as of January 1, 2013.
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