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The Bahamas Investor33FATCA stands forthe Foreign Account TaxCompliance Act. It colloquially refers to certainprovisions included in the Hiring Incentives toRestore Employment (HIRE) Act signed into lawon March 18, 2010 and effective January 1, 2013.It adds a new chapter to the Internal Revenue Code(Chapter 4) aimed at addressing perceived tax abuseby US persons through the use of offshore accounts. The new rules require foreign financialinstitutions (FFIs) to enter into an agreement withthe US Treasury and provide information oncertain US persons invested in accounts outside ofthe US and for certain non-financial foreign entities(NFFEs) to provide information about any"substantial" US owners. Non-participating FFIs or NFFEs that do notcomply are subject to 30 per cent withholding onall US source withholdable and "passthru"payments received.An FFI is any non-US entity that:. Accepts deposits in the ordinary course of abanking or similar business;. As a substantial portion of its business, holdsfinancial assets for the account of others; or. Is engaged (or holding itself out as beingengaged) primarily in the business of investing,reinvesting, or trading in securities, partnershipinterests, commodities, or any interest in suchsecurities, partnership interests, or commodities.FATCA requirementsFATCA requires a withholding agent and participatingFFIs to deduct and withhold 30 per cent on anywithholdable or "passthru" payment made to FFIs thatUS Foreign Account Tax Compliance Act due 2013 will have a far-reaching impactBy Lawrence LewisKnow yourFATCAWEALTH MANAGEMENTĀ©ISTOCK/SEAN LOCKE

34The Bahamas Investordo notcomply withFATCA andNFFEs who do notreport substantial USowners or certify nosubstantial US ownership.A withholdable payment is:. Any payment of interest (includingany portfolio interest and originalissue discount), dividends, rents,royalties, salaries, wages, annuities,compensations, remunerations,emoluments, licensing fees andother FDAP (fixed or determinableannual or periodical) income,gains, and profits, if such paymentis from sources within the US; or. Any gross proceeds from the sale ordisposition of property of a type thatcan produce interest or dividendsfrom sources within the US.Income effectively connected with aUS business is generally exempt fromwithholding under FATCA."Passthru" paymentsCertain "passthru" payments will also besubject to FATCA-a passthru paymentgenerally includes the amount of apayment that is withholdable plus anyportion of a payment that is notwithholdable multiplied by the entity'sso called "passthru payment percentage."Generally non-US entities such asbanks, certain insurance companies,hedge funds, trusts, broker/dealers,securitization vehicles, and privateequity funds will be considered FFIs.In general, the FFI Agreement requiresthe FFI to make a determination ofwhich of its accounts are US accounts,and then annually report those accountsto the US Treasury.Specifically, the FFI must agree to the following:a. Obtain information regarding each holder of each accountmaintained by the FFI as isnecessary to determine whichaccounts are US accounts;b. Comply with verification and duediligence procedures as the USTreasury requires with respect tothe identification of US accounts;c.Report annually certain informationwith respect to any US accountmaintained by the FFI;d.Deduct and withhold 30 per centfrom any passthru payment that ismade to:(i) A recalcitrant account holder(any account holder that: (1)fails to comply with reasonablerequests for informationnecessary to determine if theaccount is a US account; (2)fails to provide the name,address, and TIN of eachspecified US person and eachsubstantial US owner of a USowned foreign entity; or (3)fails to provide a waiver of anyforeign law that would preventthe foreign financial institutionfrom reporting anyinformation required underthis provision), (ii) Another financial institutionthat does not enter into anFFI Agreement, or(iii) An FFI that has elected to bewithheld upon rather than towithhold with respect to theportion of the payment thatis allocable to a recalcitrantaccount holder or to FFIs thatdo not have an FFI Agreement;e.Comply with requests by the USTreasury for additionalinformation with respect to anyUS account maintained by suchinstitution; andf. Attempt to obtain a waiver in anycase in which any foreign law would(but for a waiver) prevent thereporting of information requiredby chapter 4 with respect to any USaccount maintained by suchinstitution, and if a waiver is notobtained from each account holderwithin a reasonable period of time,to close the account.Not all US account holders in FFIsare subject to information reporting.Generally, US individuals, partnerships,trusts, estates and privately-heldcorporations, which are taxable entities,will be subject to information reportingby FFIs, while US tax-exempt entities,certain regulated financial entities, andpublicly-held corporations and affiliateswill be excluded.Although FATCA does not becomeeffective until January 1, 2013, (andcertain provisions even later),companies need to start preparing now.Certain activities will take significanttime to implement, in some cases 18-24months for projects such as systemchanges. An initial pilot analysis shouldbe performed so that budgets andtimelines are formulated appropriately.As stated in IRS Notice 2011-53, anFFI that enters into an FFI Agreementby June 30, 2013, will be identified as aparticipating FFI and thus avoidFATCA withholding that will beginJanuary 1, 2014. FFIs that enter FFI Agreements afterJune 30, 2013, but before January 1,2014, will be considered participatingFFIs for 2014, however, they may besubject to FATCA withholding due tothe lack of time to identify them as"The new rules require foreign financial institutions (FFIs) to enter into an agreement withthe US Treasury and provide information on certainUS persons invested in accounts outside of the US."WEALTH MANAGEMENT