Introduction- Two U.S. Withholding Regimes

Generally, a withholding regime is designed to collect tax on a source country's payments made to non-residents. Usually, a withholding regime applies primarily to investment income for which a paying agent may be made liable for the payment of source country tax by withholding the tax from the payment. Such a system exists in the United States for U.S. source investment income paid to non-residents of the United States. As each payment is made, U.S. withholding tax of 30% is required to be withheld unless an exception applies. The withholding agent must withhold this tax, send an information return to the payee and file an income tax return with the Internal Revenue Service ("IRS") that reflects the payments made and the tax withheld.

In addition to this non-resident withholding regime, the United States in March 2010 enacted a second withholding regime that is designed to ensure that investment income paid to an account of a U.S. person at a foreign financial institution, a foreign investment fund, or a foreign entity in which they have a significant ownership interest is reported to the IRS. Prior to the enactment of the Foreign Account Tax Compliance Act ("FATCA"), U.S. Persons were (and still are) required to report income earned outside the United States on their tax returns and to report any foreign financial accounts on separate information return referred to as an "FBAR".1 The FATCA regime has a delayed effective date of January 1, 2013. In the intervening period, the IRS and Treasury Department must provide regulations that answer even the most elemental questions such as the scope of application; affected U.S. and foreign financial institutions must invest in computer systems based upon those regulations and institute compliance procedures. Preliminary guidance, Notice 2010-60, was issued on August 27, 2010.