We have previously discussed the significance of March 18, 2012 as the effective date of certain cross-border tax provisions included in the Foreign Account Tax Compliance Act (“FATCA”). FATCA was enacted on March 18, 2010 as part of the Hiring Incentives to Restore Employment Act. March 18, 2012, marks the two-year anniversary of its enactment. Among other things, it (i) provides for a new 30% withholding tax on certain payments made to foreign entities that fail to comply with specified reporting or certification requirements and (ii) ends the practice whereby U.S. issuers sell bearer bonds to foreign investors by repealing the U.S. bearer bond exception. March 18, 2012 is a consequential date with respect to both of these provisions and we wanted to remind our clients once again of its tax significance.

March 18, 2012 marks the end of the nearly 30-year old practice whereby U.S. issuers (and controlled foreign corporations) can sell bearer bonds to foreign investors. Thus, with respect to U.S. issuers of foreign-targeted bearer bonds, FATCA repealed the exception that permits interest deductions for interest on bearer bonds sold under “arrangements reasonably designed to ensure” sales to non-U.S. persons. In addition, interest paid on such bonds will no longer qualify for treatment as “portfolio” interest, thereby subjecting such interest to a 30% U.S. withholding tax (unless reduced under a tax treaty). Also, an excise tax will be imposed on the U.S. issuer of a bearer bond (unless the bearer bond is sold under the “arrangements” noted above) and any gain realized by a holder of such bonds will be treated as ordinary income. The repeal is effective for obligations issued after March 18, 2012.

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