The U.S. government has announced it is delaying the implementation of its Foreign Account Tax Compliance Act (FATCA) by six months, providing relief to foreign financial institutions (FFIs), including banks and insurance companies in Canada, which must report on their U.S. citizen clients or face punitive withholding tax penalty under the controversial U.S. law.

On July 11, the U.S. Treasury Department said that it was moving the start of the withholding regime to July 1, 2014, six months after its previous start date of Jan. 1, 2014.

“Comments have indicated that certain elements of the phased timeline for the implementation of FATCA present practical problems for both U.S. withholding agents and FFIs,” indicated the Treasury Department in its notice announcing the change.

The U.S. government introduced FATCA in 2010 as a way to help it prevent offshore tax evasion by its citizens. The U.S. tax system is based on citizenship, not residency, meaning that U.S. citizens must file a tax return, and are liable for U.S. tax, on their worldwide income no matter where they live.

Under FATCA, foreign financial services institutions are required to provide the names and account numbers of their American citizen clients to U.S. tax authorities. Financial services firms that choose not to provide this information are to be assessed a 30% withholding tax on the income they earn from their U.S. holdings, such as their bank subsidiaries.

FATCA presents a number of troubling issues for foreign financial institution, including the cost of building in new compliance infrastructure, and conflicts between FATCA provisions and domestic privacy laws.

A number of countries — including the U.K., France, Germany, Italy and Spain — have signed intergovernmental agreements (IGA) that would enact information-exchange agreements that would serve as an alternative method of implementing FATCA. Under an IGA, an FFI would not have to report directly to the U.S. Internal Revenue Service, but through its own domestic tax authority.

Along with many other countries, Canada is pursuing an IGA with the U.S., but such a deal has yet to be announced.