The International Swaps and Derivatives Association, Inc. has launched its 2012 FATCA Protocol, which allows market participants to amend ISDA Master Agreement tax provisions to comply with the Foreign Account Tax Compliance Act (FATCA).
FATCA may impose a withholding tax on payments under derivatives transactions. The protocol places the withholding tax burden on the recipient of the payment by eliminating the tax from Indemnifiable Tax definitions in the ISDA Master Agreement. Because the recipient is able to avoid the withholding tax by complying with the FATCA rules, ISDA says, the recipient should be the party burdened with the FATCA withholding tax if it chooses to not comply.
FATCA was implemented to help the U.S. Internal Revenue Service avoid tax evasion by U.S. persons holding investments offshore. Firms that do not comply with FATCA are dubbed recalcitrant account holders and are subject to a 30% withholding tax on dividends, interest and a proportion of gross proceeds paid to them. For more on FATCA, see Hedge funds and FATCA: bracing for impact, Global Custodian, Winter 2011.
The protocol is now available to ISDA members and non-members on the associations Web site.
A Thomson Reuters survey released in June found that while most firms are aware of the decisions that need to be taken around FATCA, minimal regulatory guidance, lack of budgetary allocation and partial board awareness threaten to stretch already saturated risk and compliance functions in the financial services sector.
The FATCA protocol follows the release of a Dodd-Frank protocol by ISDA earlier this week.
(CG)