Foreign Account Tax Compliance Act (FATCA)

by | Oct 14, 2013 | Uncategorized | 0 comments

Taking yet another step toward its goal of addressing off-shore account reporting, in 2010 the Obama Administration enacted the Foreign Account Tax Compliance Act (FATCA). FATCA, a new chapter in the U.S. Tax Code – Chapter 4, is part of Hiring Incentives to Restore Employment  (HIRE) Act of 2010 that seeks to identify U.S. taxpayers having accounts as Foreign Financial Institutions (FFIs) and attempts to enforce reporting of U.S. held accounts and foreign source income.

About Foreign Account Tax Compliance Act (FATCA)
FATCA is part of the HIRE Act passed into law on 18 March 2010 in the U.S.  Most notably, FATCA will require foreign banks to report and disclose U.S. interests in foreign financial institutions (FFIs). FATCA seeks to enforce reporting of U.S. held foreign accounts by mandating 30 percent withholding on U.S. source income (including gross sales proceeds), should any account holder or FFI not comply.

All foreign financial institutions (FFIs) will be required to enter into disclosure compliance agreements with the U.S. Treasury, and all non-financial foreign entities (NFFEs) must report and/or certify their ownership or be subject to 30 percent withholding. This reporting and withholding regime will ultimately impact current account opening processes, transaction processing systems and “know your customer” procedures utilized by banks. Chief compliance officers, tax reporting heads and other key players within your organization will need to evaluate the potential impact of these regulations and develop a plan for managing and remediating any potential risk associated with Foreign Account Tax Compliance Act (FATCA) non-compliance.

Basic Highlights of FATCA Regulations:

Improving the general tax compliance level of US tax payers

  • Combating offshore tax evasion/avoidance through tax havens
  • Reporting requirements and disclosure on financial accounts owned by US tax payers and its timelines
  • Introducing withholdable payments at 30% on any payment of US source income and gross proceeds from sale of securities that generate US source income for non-compliant account holders who fail to provide sufficient information to determine whether or not they are US persons and remit same to the Internal Revenue Service (IRS)
  • Introducing an initial US$10,000 ( which may increase to US $50,000 for continuous non-compliance) and 40% penalty for understatement of income for US owners of foreign assets who do not disclose assets worth more than US$50,000 along with the tax returns
  • Introducing 30% withholdable payments on US source income to non-compliant Foreign Financial Institutions (FFIs) and Non-foreign Financial Institutions (NFFEs) or US financial assets held by non-compliant FFIs and NFFEs

 

Who falls into these FATCA reporting categories?

There are three broad categories of people covered by the reporting requirements of FATCA, namely: Foreign Financial Institutions (FFIs), Non-Financial Foreign Entities (NFFEs) and U.S. individuals.

  1. FFIs include any non-U.S. financial institution including banks, securities brokers, hedge funds, investment vehicles, private equity funds, securitization vehicles, life insurance companies and most pension plans.
  2. NFFEs include any foreign entity that is not an FFI. Exceptions are publicly traded corporations, foreign governments, or any wholly owned agency of any international organization or foreign central bank.
  3. U.S. Individuals are subject to FATCA for accounts directly held by that U.S. person at an FFI. The rule also cover accounts of non-U.S. entities with substantial U.S. owners (defined as greater