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May 4, 2012 Update: On May 4, 2012, ISDA published a revised version of the ISDA FATCA Provision. Please see the table of documents below for the latest version.

February 16, 2012 Update: On February 8, 2012, Treasury and IRS released proposed regulations under FATCA, which are available here. Also released on the same day were a joint statement issued by the Treasury Department with France, Germany, Italy, Spain and the United Kingdom (available here), a Treasury press release and an IRS press release. Although ISDA’s committees are still examining the proposed regulations it is worth noting that the proposed regulations extended the last date on which a derivative transaction may be entered into and still qualify for an exemption from the withholding provisions of FATCA from March 18, 2012 until January 1, 2013.  After that date, any trade agreed to between counterparties is potentially subject to FATCA withholding, as described further in the information available below.  Please note that the information available below has not yet been updated and so still contains references to the March 18, 2012 date. ISDA will continue to follow the developments under FATCA in the months ahead.

Original November 21, 2011 Posting

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.

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 opt in to the FATCA reporting regime (“participating FFIs”) to report information 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 developed language that 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. Market participants may wish to consider including this language in their ISDA documentation. 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?

Although the law does not go into effect until 2013, March 18, 2012 is the last date on which a derivative transaction may be entered into and still qualify for an exemption from the withholding provisions of FATCA.  After that date, any trade agreed to between counterparties is potentially subject to FATCA.