The long arm of the IRS

The effective date for the long-anticipated US FATCA (Foreign Account Tax Compliance Act) is here and the impact on investors’ pockets could be substantial. After today wallets may be a little lighter for those hit with the 30% withholding tax on their US sourced payments on things such as dividends, interest and insurance premiums. Even as the markets continue to stabilize and the darkest times seem to be behind us, it is foolish to think that this date will pass by without some feeling queasy about a potential 30% drop in their income.

Notably, in reaching this FATCA milestone, the long arm of the law has become just a little bit longer. Non-US foreign financial institutions, such as banks and prime brokers, are required to have in place new on-boarding procedures to gather information on account openings to identify the US status of the investor and report this to the IRS. If US status can’t be determined the investor will automatically be subject to the withholding tax. With institutions effectively acting on behalf of the IRS – unofficially, of course – to impose the penalty for non-compliance, it brings up the question whether this sort of ‘extension’ of powers could perhaps take hold with other regulators?

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