FATCA provisions were introduced by the US Government in March
2010 to combat tax evasion by US persons holding investments in
FATCA imposes a 30% withholding tax on an extensive list of
payments, including payments to non-participating foreign financial
institutions (FFIs) and other payees that have not
complied with the FATCA requirements. FATCA also imposes a broad
range of other obligations on FFIs including reporting and due
diligence obligations. The IRS
website explains the FATCA compliance obligations in further
As a result of FATCA's broad extraterritorial reach, many
Australian financial institutions are concerned that they will be
treated as FFIs under the rules and therefore subject to
potentially onerous FATCA compliance obligations.
Australian Government explores measures to assist
The Australian Government's announcement on 28 August was
made in response to these concerns. As well as seeking to minimise
the costs of FATCA compliance for Australian FFIs, the IGA will aim
to enhance the tax co-operation arrangements between Australia and
Treasury has invited interested parties to comment on the
advantages and disadvantages of an IGA between Australia and the
US, based on the US Model IGA published on 26 July 2012, as an
alternative to individual agreements between Australian financial
institutions and the US Internal Revenue Service. The closing date
for submissions is 28 September 2012.
ISDA FATCA Protocol
The implications of FATCA has also been a focus for the
International Swaps and Derivatives Association
(ISDA). On 15 August ISDA published the
ISDA FATCA Protocol to allow market participants to amend the
tax provisions of their ISDA Master Agreements if they wish to
address the effect of FATCA on derivatives transactions.
The impact of the Protocol language is to place the FATCA
withholding tax burden on the recipient of the payment. The
rationale is that the recipient is the sole party that has the
ability to avoid the withholding tax by complying with the FATCA
In other words, ISDA believes that the payee (and not the payer)
should be the party burdened with the FATCA withholding tax if the
payee chooses not to comply. This addresses the concerns expressed
by many ISDA counterparties that, unless amendments of the kind
contemplated by the Protocol are made, the standard ISDA terms will
require the payer to gross-up for the FATCA non-compliance of the
The amendments contained in the Protocol place the FATCA
withholding tax burden on the recipient of the payment by
eliminating this tax from the definition of "Indemnifiable
Tax" in the ISDA Master Agreement.
Under the FATCA transitional provisions, derivatives
transactions entered into after 1 January 2013 could potentially be
subject to FATCA withholding from as early as 1 January 2014.
ISDA has strongly encouraged ISDA counterparties to adhere to
the Protocol as quickly as possible so that the FATCA risk can be
addressed by the market before the end of the year.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
Persons listed may not be admitted in all states and
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.