More Tax Regulations – FATCA

Enacted in 2010 as  part of the Hiring Incentives to Restore Employment (HIRE) Act, the Foreign  Account Tax Compliance Act, or FATCA, is intended to prevent tax evasion by  certain U.S. investors holding financial assets offshore.   It essentially requires foreign financial institutions  that hold investments for U.S. clients to relay information to the IRS about  their investors which they never had to before.

The consequence of not doing so is U.S. paying agents for these institutions – like stock transfer agents – must withhold  30% on any dividends, interest or related proceeds paid to U.S. taxpayers  owning assets through these foreign institutions.   The jaws with these teeth close on January  1, 2014, by which time a foreign financial institution must have signed an agreement with the IRS to  become a Participating Foreign Financial Intermediary (“PFFI”), and elicit that  information from investors which the IRS requires.   If it has not, the 30% withholding on all  future payments to that institution goes into effect automatically.   Fortunately, investors  affected will only be those with $50,000 or more in reportable assets.   Unfortunately, failure by such investors to report qualifying assets and proceeds  (on form 8938) could result in minimum fines of $10,000.

Like a lot of these regulations, there are  unintended consequences.   There could be substantial costs related to software re-tooling and procedural change  training, on “both sides of the ocean.”    U.S. transfer agents will have to “layer on” additional monitoring of  assets that could qualify for FATCA, and perform tax withholding as applicable.   Ironically, transfer agents and other record  keepers may be inconvenienced more than the applicable investors, who are probably smart enough to move affected assets to less transparent and costly places as  necessary.   Thus, all the “taxes evaded”  that legislators have claimed will be recouped will likely amount to much less  than promised.

The take-away for our readers is the march  toward closer and closer monitoring of investors’ assets, and tax reporting on them, continues unabated.   The re-tooling expense for “cost basis” affecting stock issuers in 2010-2012 could now be followed by similar FATCA-related charges.    Hopefully, transfer agents will not attempt to impose another  “assessment” on its corporate clients to implement FATCA; but, if they do, question it – and, if you are an issuer,  feel free to give us a call on 415-472-2238 if you would like our thoughts on your particular  situation (no charge of course).