On February 8, 2012, the US Treasury Department (“US Treasury”) and the Internal Revenue Service (“IRS”) released long-awaited proposed regulations on the Foreign Account Tax Compliance Act (“FATCA”). The proposed regulations provide further guidance on many topics, including the steps that foreign financial institutions (“FFIs”) will need to take to ensure that they identify their US accounts and report information about these US accounts to the IRS each year. These rules are enforced by a 30% withholding tax on US-source payments to FFIs that fail to comply, although the proposed regulations phase this withholding tax in over the next few years. On the same day, the US Treasury and the governments of France, Germany, Italy, Spain and the United Kingdom released a joint statement – the negotiation of which likely caused the delay in the issuance of the proposed regulations – on a possible intergovernmental approach to the implementation of FATCA and improving international tax compliance. Under this framework, each foreign government would collect FATCA information from its own financial institutions and then transfer that information automatically to the United States each year and the United States would reciprocate by collecting and sharing information about non-US accounts at US financial institutions.

This alert provides an overview of the changes to prior FATCA guidance in the proposed regulations, with a focus on the issues for investment funds. The key developments in the proposed regulations, which are discussed in more detail below, are as follows...