FATCA Can Effect World Finance

The credit rating agency Fitch Ratings stated that the US Foreign Account Tax Compliance Act (FATCA) could have wide-ranging effect for global finance transactions.

Let us recall that FATCA came into effect in March 2010 and is aimed to provide the US tax authorities with information on foreign financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial share. Non-joining to FATCA will result in withholding a 30% tax on US-source income for foreign financial institutions (they include banks, paying agents, custodians and special purpose vehicles).

Fitch Ratings warns that the Act can entail cash flow disruptions and individual transactions. Regarding cross-border finance transactions with US assets Fitch adds that FATCA status of the special purpose vehicles will be at the center of attention. For instance, there are situations where notes may be issued by a foreign special purpose vehicle while some cash flows may originate from US assets. In such case the special purpose vehicles are treated as non-participating foreign financial institutions and a 30% withholding tax may be applied to some intra transactions. This will reduce significantly the ability of the transaction to make ultimate payments to note holders.