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(The article featured below is a selection from International Securities and Financial Reporting Update, which is available to subscribers of that publication.)

European Commission Concerned About Reach of Foreign Account Tax Compliance Act

The European Commission is concerned that the Foreign Account Tax Compliance Act ("FACTA") could impose a significant compliance burden on EU financial institutions and investment funds. In a letter to Treasury Secretary Tim Geithner and IRS Commissioner Douglas Shulman, Commissioner for Taxation Algirdas Šemeta invited U.S. authorities to engage in a dialogue on how to best achieve the objectives of the Foreign Account Tax Compliance Act. In a speech delivered late last year, the Commissioner had said that the Commission has received complaints that the FATCA legislation will introduce a very onerous new set of reporting requirements for EU financial entities which do business in the U.S. or have U.S.-resident investors on their books.

FATCA is U.S. legislation intended to ensure that U.S. tax authorities obtain information on investments by U.S. residents in foreign financial institutions, including European financial institutions. In this regard it pursues goals similar to those of the EU Savings Tax Directive which provides for an exchange of information between tax authorities of EU member states.

The letter to Treasury and the IRS stated that, in light of the information exchange tools that already exist between tax administrations, and given the ongoing discussions on extending the scope of the Savings Tax Directive, the Commission invited the U.S. authorities to consider synergies to achieve their common goals in a cost-effective and business-friendly way.

Since the enactment of FATCA, as part of the HIRE Act, in March of 2010, EU business and financial associations have expressed concerns about the legislation, in particular the costs of compliance and penalties that it will entail in case of non-compliance. The Commission discussed the issue with member states and obtained their support for an EU-wide approach aimed at exploring solutions that would ensure that U.S. tax authorities can obtain the information they require on investments by U.S. residents in foreign financial institutions without any excessive burden on the EU financial industry.

The EU Savings Tax Directive, like FATCA, imposes obligations on financial intermediaries requiring paying agents to report information on interest income paid to individual investors to tax authorities. A revision of that Directive, in order to expand its scope, is at an advance stage. EU tax authorities also exchange information with each other under the EU Directive on Administrative Cooperation and with third countries, including the U.S., under information exchange clauses in bilateral double taxation treaties.

Under FATCA, foreign financial institutions with U.S. customers and foreign non-financial entities with substantial U.S. owners must disclose information regarding U.S. taxpayers directly to the IRS. Failure to disclose information will result in a requirement on non-U.S. financial intermediaries to withhold a 30% tax on U.S.-source income. The European financial industry estimates that the costs of modifying their IT systems and the administrative burden of ensuring compliance with FATCA would be significant.