03 September 2012

FATCA effective date is fast approaching

The Australian Government announced on 28 August that it is exploring the feasibility of an intergovernmental agreement (IGA) with the US to minimise the costs for Australian stakeholders of complying with Foreign Account Tax Compliance Act (FATCA).

What is FATCA?

FATCA provisions were introduced by the US Government in March 2010 to combat tax evasion by US persons holding investments in non-US accounts.

FATCA imposes a 30% withholding tax on an extensive list of payments, including payments to non-participating foreign financial institutions (FFIs) and other payees that have not complied with the FATCA requirements. FATCA also imposes a broad range of other obligations on FFIs including reporting and due diligence obligations. The IRS website explains the FATCA compliance obligations in further detail.

As a result of FATCA's broad extraterritorial reach, many Australian financial institutions are concerned that they will be treated as FFIs under the rules and therefore subject to potentially onerous FATCA compliance obligations.

Australian Government explores measures to assist compliance

The Australian Government's announcement on 28 August was made in response to these concerns. As well as seeking to minimise the costs of FATCA compliance for Australian FFIs, the IGA will aim to enhance the tax co-operation arrangements between Australia and the US.

Treasury has invited interested parties to comment on the advantages and disadvantages of an IGA between Australia and the US, based on the US Model IGA published on 26 July 2012, as an alternative to individual agreements between Australian financial institutions and the US Internal Revenue Service. The closing date for submissions is 28 September 2012.

ISDA FATCA Protocol

The implications of FATCA has also been a focus for the International Swaps and Derivatives Association (ISDA). On 15 August ISDA published the ISDA FATCA Protocol to allow market participants to amend the tax provisions of their ISDA Master Agreements if they wish to address the effect of FATCA on derivatives transactions.

The impact of the Protocol language is to place the FATCA withholding tax burden on the recipient of the payment. The rationale is that the recipient is the sole party that has the ability to avoid the withholding tax by complying with the FATCA rules.

In other words, ISDA believes that the payee (and not the payer) should be the party burdened with the FATCA withholding tax if the payee chooses not to comply. This addresses the concerns expressed by many ISDA counterparties that, unless amendments of the kind contemplated by the Protocol are made, the standard ISDA terms will require the payer to gross-up for the FATCA non-compliance of the payee.

The amendments contained in the Protocol place the FATCA withholding tax burden on the recipient of the payment by eliminating this tax from the definition of "Indemnifiable Tax" in the ISDA Master Agreement.

Under the FATCA transitional provisions, derivatives transactions entered into after 1 January 2013 could potentially be subject to FATCA withholding from as early as 1 January 2014.

ISDA has strongly encouraged ISDA counterparties to adhere to the Protocol as quickly as possible so that the FATCA risk can be addressed by the market before the end of the year.

For more information please contact Louise McCoach or Mark Friezer.

Disclaimer
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.
For more information, contact...
Email: Louise McCoach, Partner
Tel: +61 2 9353 4679
Email: Mark Friezer, Partner
Tel: +61 2 9353 4227