New proposed legislation would add compliance costs and responsibilities for U.S. payors and affect non-U.S. recipients of U.S. source income.  The new legislation, called the Foreign Account Tax Compliance Act of 2009 (“FATCA” OR “FATCAT”), would apply to any outbound payment made on of after January 1, 2011.  FATCAT has the following key provisions:

FATCAT would apply to all “foreign financial institutions”, including foreign banks, hedge funds, private equity funds, investment banks, and insurance companies that sponsor investment funds.  These entities may choose to enter into an agreement with the IRS under which the entity is required to identify and report on accounts maintained by U.S. persons.  Such IRS agreements would impose significant due diligence and verification requirements on foreign financial institutions in respect of such institution’s obligation to identify U.S. beneficial owners of accounts maintained by the institution.  If a foreign financial institution does not enter into an agreement with the IRS, the payor of any U.S. payment to the foreign institution, or an account maintained by it, must withhold 30% of the outbound payment.  If the beneficial owner of an account is entitled to a refund, that beneficial owner would have to claim a refund from the IRS.  Thus foreign financial institutions that are resident in a treaty country, as well as foreign recipients of foreign source capital gains, would be forced to apply for U.S. tax refunds.  The guidelines for doing so are currently unclear.

Any foreign payee entity that is not a financial institution would be required to provide a beneficial owner withholding certificate or certify that the entity has no “substantial U.S. owner” (essentially, a 10% U.S. owner).  Failure to do so would result in application of the 30% withholding tax.  The withholding agent may rely on the withholding certificate only if the agent does not know and has no reason to know that the information reported therein is incorrect and the withholding agent reports the information to the IRS.