FATCA’s Impact on Structured Products

Abstract

On March, 18, 2010, President Obama signed the Hiring Incentives to Restore Employment Act (HIRE Act) into law. While the main focus of the law is to provide incentives for hiring and retaining unemployed workers, it also contains provisions to address offshore tax evasion. These provisions, commonly referred to as the Foreign Account Tax Compliance Act (FATCA), add an entirely new and significant U.S. withholding and information reporting tax regime to the Internal Revenue Code. FATCA was enacted to ensure there is no gap in the ability of the U.S. government to determine the ownership of U.S. assets in foreign accounts and to prevent offshore tax abuses by U.S. persons—in particular to prevent a U.S. person from escaping U.S. tax liability by owning U.S. assets through foreign accounts. During the last decade, U.S. persons, including financial institutions, corporations, and individuals, have invested trillions of dollars into global loan syndications and participations, as well as multi-party repos and swap or derivative products. Now banks and other financial sponsors will have to determine how FATCA and the preexisting U.S. tax information reporting and withholding rules interact and are applied to cross-border structured financial products. This article explores the impact of FATCA on cross-border loan participations, syndications or multi-party repo transactions, and on notional principal contracts or derivatives.