The Foreign Account Tax Compliance Act (“FATCA”), enacted by the U.S. Congress in March 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, is an important development in the United States efforts to combat tax evasion by U. S. persons holding investments in offshore accounts. FATCA requires Financial Institutions (FIs) to report certain information about certain financial accounts held by U.S. persons or by foreign entities in which U.S. persons hold a substantial ownership interest.
FATCA stands for the Foreign Account Tax Compliance Act. It refers to provisions included in the Hiring Incentives to Restore Employment Act signed into law on March 18, 2010 and effective January 1, 2013. It adds a new chapter to the Internal Revenue Code (Chapter 4) aimed at addressing perceived tax abuse by U.S. persons through the use of offshore accounts. The new rules require foreign financial institutions (FFI’s) to provide the Internal Revenue Service (IRS) with information on certain U.S. persons invested in accounts outside of the U.S. and for certain non-U.S. entities to provide information about any U.S. owners.
In general, an FFI will enter into an agreement (referred to as “FFI Agreement”) with the U.S. Department of Treasury (U.S. Treasury) by which the FFI can avoid FATCA withholding on payments it receives (and become a participating FFI). Generally, an FFI Agreement requires a determination of which accounts are “United States accounts” (see # 5), compliance with verification and due diligence procedures, annual reporting on those United States accounts to the U.S. Treasury (see below), compliance with additional IRS reporting requests and withholding of 30% where applicable (e.g., recalcitrant account holders, non-participating FFIs).
FFI’s that enter into an FFI agreement with the IRS will need to report the following information on their U.S. accounts:
A non-participating FFI will be subject to 30% withholding on each payment that is routed through a participating FFI.
The IRS will publish a list of all participating FFIs on their website. The List will be published for the first time in the beginning of July 2014 and will be updated on a monthly basis.
A U.S. Account is an account held by a U.S. citizen, U.S. resident or an entity that has a substantial U.S. owner (also referred to as U.S. owned company).
A substantial U.S. owner generally refers to a shareholder who is a U.S. citizen or resident who has a 10% or greater interest, by shares or vote, in an entity.
FATCA imposes three main obligations FFIs:
1. Documentation and Due Diligence
Classify and (where applicable) document all new and existing customers as U.S. taxpayers, non-U.S. taxpayers, or exempt from documentation and/or reporting.
2. Withholding
Withhold 30% on withholdable payments being sent to: (a) non-participating FFIs, i.e., FFIs that do not comply with FATCA; and (b) the accounts of recalcitrant clients (i.e., those who fail to provide requested documents and/or information required by Maduro & Curiel’s Bank N.V. for FATCA compliance).
3. Reporting
Report annually on:
(a) all U.S. taxpayers who are not exempted;
(b) recalcitrant accounts;
(c) non-participating FFIs;
(d) certain non-financial foreign entities; and
(e) other persons as required under FATCA.
“Withholdable” payments are U.S. sourced payments the IRS sees as posing the risk for potential tax avoidance. They include (a) any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, and other fixed or determinable annual or periodic gains, profits, and income if such payment is from sources within the United States; and (b) any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States.
U.S. source payment is a payment of income that arises from sources within the U.S. The source of income is determined based on the type of income. The source of compensation income is where the services giving rise to the income were performed. The source of certain income, such as dividends and interest, is based on residence of the payer. The source of income from property is based on where the property is used. Significant additional rules apply.
The FFI Agreement will come into effect on July 1, 2014 or a later date if the FFI registration takes place after July 1, 2014.
This is the requirements to implement procedures that will allow the FFI to collect all required information and documentation from new customers to identify U.S. citizens and residents and to collect the information for reporting under FATCA.
Account holders that became customers of the FFI before July 1, 2014.
Account holders that become a customer of the FFI from July 1, 2014 onward.
Through an electronic search of the FFI’s database based on the U.S. indicia.
FATCA lists seven indicia of U.S. status:
U.S. Indicia | Documentation Required |
U.S. citizenship or lawful permanent resident | Obtain W-9 |
U.S. birth place | 1. Obtain W-9 or W-8BEN; and |
U.S. address (residence, correspondence, or P.O. Box) | 1. Obtain W-9 or W-8BEN; and |
Instructions to transfer funds to U.S. accounts or directions regularly received from a U.S. address | 1. Request W-9 or W-8BEN; and |
Only address on file is “in care of” or “hold mail” or U.S. P.O. Box Notice 2011-34 excludes foreign PO Box as US indicia | 1. Request W-9 or W-8BEN; and |
Power of Attorney or signatory authority granted to person with U.S. address | Request W-9, W-8BEN; or |
A joint account which has one U.S. owner is treated as a U.S. account and the entire account is subject to reporting to the U.S. person. The fact that they are not U.S. residents does not make a difference.
A “recalcitrant accountholder” is any accountholder that:
The money that is withheld by a FFI, must be transferred to the U.S. Treasury department.
The FATCA rules require that you ask any U.S. customer to waive their rights under the privacy or secrecy rules so that you can report their information to the U.S. Government. If they refuse to provide this waiver then you are required to close the account.