The Foreign Account Tax Compliance Act ("FATCA") is U.S. legislation which was signed into U.S. Law on 18 March 2010, as part of the U.S. Hiring Incentives to Restore Employment (HIRE) Act. The fundamental objective of FATCA is to identify those U.S. persons who may be evading tax through the use of offshore investment vehicles and to ensure that the Internal Revenue Service ("IRS") can identify and collect the appropriate amount of tax from all U.S. persons.
Although the primary purpose is prevention and detection of tax evasion by a U.S. person, FATCA will have significant impact across financial markets and will affect non-U.S. companies and individuals. FATCA requires all foreign financial institutions ("FFIs") to register with the IRS, perform due diligence to identify U.S. accounts and report client data to the IRS directly or to their local government through an Intergovernmental Agreement ("IGA"). FFIs that do not comply will suffer a 30% withholding tax on all U.S. sourced income or payments remitted to them by U.S. paying agents or other FFIs.