Monday, January 16, 2012

Treasury Official Assures Congressmen Concerned about FATCA’s Impact on Capital Markets

A senior US Treasury official has assured four Members of the House of Representatives that their concerns about the impact of FATCA on the U.S. capital markets will be kept in mind during the drafting of FATCA regulations. In a letter to Rep. Blaine Leutkemeyer (R-MO), Emily S. McMahon, Acting Assistant Secretary (Tax Policy), said that Treasury and the IRS are working assiduously to provide further guidance that will help to implement FATCA in an efficient, effective and commercially reasonable manner. This guidance will reflect careful consideration of the comments that they are receiving from the financial industry. The four concerned Members are Rep. Luetkemeyer,Rep. Ron Paul (R-TX), Rep. John Campbell (R-CA), and Rep. Donald Manzullo (R-Il).

Passed as part of the Hiring Incentives to Restore Employment Act (HIRE), FATCA creates a new reporting and taxing regime for foreign financial institutions with U.S. accountholders. FATCA adds a new Chapter 4 to the Internal Revenue Code, essentially requiring foreign financial institutions to identify their customers who are U.S. persons or U.S.-owned foreign entities and then report to the IRS on all payments to, or activity in the accounts of, those persons. The Act broadly defines foreign financial institution to comprise not only foreign banks but also any foreign entity engaged primarily in the business of investing or trading in securities, partnership interests, commodities or any derivative interests therein.

According to the Joint Committee on Taxation, investment vehicles such as hedge funds and private equity funds will fall within this definition. Firms meeting the definition must enter into agreements with the IRS and report information annually in order to avoid a new U.S. withholding tax.

In their letter to Treasury, the Members said that FATCA's damage to the markets could appear in many forms. The most immediate impact, as foreign investors abandon US markets before 2013, could be rapidly deteriorating stock and bond prices. Any sharp drop in stock and bond prices, in turn, could impair consumer confidence, they noted, and the combined effect of these results could decimate any fragile economic recovery. The long-term impacts of FATCA could include reluctance by foreign firms to enter U.S. markets or conduct business domestically and the relocation of U.S. firms offshore.

In its response letter, Treasury shared the Members’ commitment to maintaining strong U.S. capital markets and said it has been closely consulting with U.S. and foreign financial institutions in developing guidance to implement FATCA. In addition, Treasury and the IRS issued a Notice on July 14, 2011, providing for phased implementation of the obligations imposed by FATCA over a transition period lasting through 2015, in order to provide financial institutions sufficient time to adapt their procedures and information technology systems.