Recent efforts of the U.S. government to recapture tax dollars hidden in offshore investment accounts have captured the full attention of leading banks and investment firms overseas.U.S. investment firms, however, have no reason to relax. More than ever before, U.S. mutual funds and other providers of U.S.-based investment offerings will be charged with policing these new efforts to compel proper reporting of U.S. taxpayer income.
The Foreign Account Tax Compliance Act (FATCA), which took effect on July 1, imposes an array of new compliance obligations on U.S. mutual funds. Signed into law on March 18, 2010, as part of the Hiring Incentives to Restore Employment Act (the HIRE Act), FATCA's primary goal is to combat tax evasion by U.S. taxpayers who fail to report income from overseas investments.To this end, FATCA imposes stringent due diligence, reporting and withholding obligations on foreign financial institutions (FFIs). Certain other non-U.S. entities that derive largely passive, investment type income (passive non-financial foreign entities or passive NFFEs) must disclose direct or indirect "substantial U.S. owners." Enforcement of this new tax compliance regime, however, falls primarily upon U.S. mutual funds and other providers of U.S. investment products.