FATCA

To address the effects of FATCA on derivatives transactions, on August 15, 2012 ISDA published a Protocol to allow market participants to amend the tax provisions of their ISDA Master Agreements. The amendments contained in the Protocol 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 rules; therefore, the recipient should be the party burdened with the FATCA withholding tax if it chooses to not comply.

Available below are frequently asked questions and various other information resources relating to FATCA.

On August 16, ISDA held a market education call on FATCA, which can be streamed by clicking below. Also available is the accompanying presentation.

ISDA FATCA Protocol Market Education Call – Audio Recording
ISDA FATCA Protocol Market Education Call – Presentation (PDF)

ISDA FATCA Protocol Market Education Call - Webcast (Replay Available Until: 09/06/2012)

The following are responses to the most frequently-asked questions that ISDA has received in connection with the application of the Foreign Account Tax Compliance Act (FATCA) to derivative transactions. The following does not constitute legal advice. Parties should consult with their legal and tax advisers and any other adviser they deem appropriate prior to using the ISDA FATCA provision.

IRS Circular 230 Disclosure: ISDA does not provide tax advice. Any discussion of US tax matters on this website cannot be used for the purpose of avoiding tax penalties.

Also available are the ISDA FATCA market education note and an audio recording of the November 2011 FATCA market education call (ISDA member login required). These provide more on FATCA's effect on derivatives transactions and the proposed ISDA language that market participants may wish to consider incorporating in their ISDA documentation.

What is FATCA?

The Foreign Account Tax Compliance Act (FATCA) refers to US Internal Revenue Code sections 1471 through 1474, which were enacted by the Hiring Incentives to Restore Employment Act of March 2010 with an effective date of January 1, 2013. The intent behind FATCA is to help the US Internal Revenue Service (IRS) “combat tax evasion by U.S. persons holding investments in offshore accounts.”[1]

What is the impact of FATCA on non-US financial institutions?

Broadly speaking, FATCA requires foreign financial institutions (“FFIs”) that are either residents in FATCA Partner Countries via an Intergovernmental Agreement (“IGA”) or opt in to the FATCA reporting regime (“participating FFIs”) to report information to either their home government or directly to the IRS regarding their US account holders in order to assist the IRS in enforcing US taxpayer compliance and to potentially withhold 30% US tax on payments made to account holders or other FFIs. Any entity which makes a payment of US source income (or items considered US source for FATCA purposes) must consider whether the payment is subject to FATCA withholding.

What is the impact of FATCA on US financial institutions?

U.S. entities, both financial and non-financial, that make payments of most types of US source income to non-US persons will be impacted as they may now be required to withhold a 30% tax on the payments to those non-US persons. This will require the US entities to collect and maintain documentation on those non-US persons and also track whether those persons are classified as subject to withholding under FATCA.

What are the effects of FATCA on derivatives transactions?

FATCA imposes a 30% withholding tax on an expansive list of payments,[2] including payments of gross proceeds to non-participating FFIs and other payees that are not FATCA compliant.

What is ISDA doing to address the effects of FATCA on derivatives transactions?

ISDA has published a FATCA Protocol. The FATCA provision in the Protocol carves out FATCA withholding tax from the definition of “Indemnifiable Tax” in the ISDA Master Agreement. The impact of the proposed 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 rules; therefore, the recipient should be the party burdened with the FATCA withholding tax if it chooses to not comply. Additional FATCA-related issues are also discussed in the ISDA FATCA market education note.

PARTIES SHOULD CONSULT WITH THEIR LEGAL AND TAX ADVISERS AND ANY OTHER ADVISER THEY DEEM APPROPRIATE PRIOR TO USING THE ISDA FATCA PROVISION.

Why should parties consider incorporating the ISDA language prior to the January 1, 2013 effective date?

Under current law, grandfathering of derivatives transactions from FATCA withholding expires December 31, 2012. Since transactions executed January 1, 2013 could potentially be subject to FATCA withholding beginning as early as January 1, 2014, there is some urgency to amending agreements to address FATCA withholding prior to that January 1, 2013 date. Many counterparties in the market have expressed concerns with trading under ISDA Master Agreements that require the Payor to gross-up for the FATCA non-compliance of the Payee. In order to prevent market disruption, parties are strongly encouraged to adhere to the Protocol as quickly as possible to provide their counterparties comfort in advance of 2013.


[1] IRS “Summary of Key FATCA Provisions” at http://www.irs.gov/businesses/corporations/article/0,,id=236664,00.html.

[2] See the ISDA FATCA market education note for more information on the derivative payments that may be subject to the FATCA withholding tax.


DateTitle / DescriptionDocuments
November 11, 2013
ISDA Comments on FATCA – follow-up on previous comment letters
ISDA comment letter to the United States Internal Revenue Service and Department of the Treasury with follow-up comments on earlier ISDA comment letters relating to FATCA (specifically relating to SPVs and collateral, respectively).
20131114 Corrected ISDA follow up FATCA letter with Exhibits.pdf
August 28, 2013
ISDA Comments on FATCA – ISDA Proposal for FATCA regulations and SPVs
ISDA comment letter to the United States Department of the Treasury with a proposal for treatment of special purpose vehicles under FATCA.
ISDA letter and proposal for FATCA regulations.pdf
June 11, 2013
ISDA Comments on FATCA - Article 4(1) of the Model I IGA
ISDA comment letter to the United States Department of the Treasury on Article 4(1) of the Model Intergovernmental Agreement to Improve Tax Compliance and to Implement FATCA.
ISDA Letter re Article 4(1)(d) of Model IGA.pdf
April 18, 2013
ISDA Comments on Final FATCA Regulations
ISDA comment letter to the United States Department of the Treasury on the Final FATCA Regulations issued on January 17, 2013.
20130418 Final FATCA Regulations - ISDA Comment letter.pdf
November 20, 2012
ISDA Comments on FATCA grandfathering
ISDA comment letter to the United States Department of the Treasury on the grandfathering provisions included in Section VI of Announcement 2012-42 issued on October 24, 2012 by the Treasury Department related to FATCA.
ISDA_FATCA_Comment_Letter_on_Grandfathering_11-20-12.pdf
September 4, 2012
ISDA Comments on Proposed FATCA Regulations
ISDA comment letter to the United States Department of the Treasury and Internal Revenue Service on the proposed regulations issued on February 15, 2012 by the Treasury Department pursuant to Sections 1471-1474 of the Internal Revenue Code of 1986, as amended, commonly referred to as “FATCA”.
20120904 ISDA FATCA Comment Letter FINAL.pdf
August 16, 2012
ISDA FATCA Market Education Note
The ISDA North American Tax Committee developed the ISDA FATCA Market Education Note as a resource for more information on FATCA and its effect on derivatives transactions. The note also explains the ISDA FATCA Provision, which market participants may wish to consider incorporating in their existing or future ISDA Master Agreements to address FATCA, as well as additional FATCA-related issues.
20120816 Updated ISDA FATCA educational note.pdf
August 15, 2012
Revised version of the ISDA FATCA Provision
The ISDA North American Tax Committee developed the ISDA FATCA Provision, which market participants may wish to consider incorporating into their existing or future ISDA Master Agreements to address FATCA
20120815 Final_Revised ISDA FATCA Provision.pdf
May 4, 2012
Revised version of the ISDA FATCA Provision. (This version has been replaced by the version published on August 15, 2012)
The ISDA North American Tax Committee developed the ISDA FATCA Provision, which market participants may wish to consider incorporating into their existing or future ISDA Master Agreements to address FATCA
20120504 Final_Revised ISDA FATCA Provision.pdf
November 21, 2011
ISDA FATCA Provision. (This version has been replaced by the version published on August 15, 2012)
The ISDA North American Tax Committee developed the ISDA FATCA Provision, which market participants may wish to consider incorporating in their existing or future ISDA Master Agreements to address FATCA.
ISDA FATCA Provision.pdf