Foreign Account Tax Compliance Act (FATCA)

What is FATCA?

The Foreign Account Tax Compliance Act (FATCA), as part of the Hiring Incentives to Restore Employment (HIRE) Act, is an important development in the United States (US) efforts to combat tax evasion by US persons holding investments in offshore accounts.

FATCA will require:

  • US taxpayers holding financial assets outside the US to report those assets to the Internal Revenue Service (IRS).

  • Foreign financial institutions (FFIs) to report directly to the IRS certain information about financial accounts held by US citizens.

  • FFIs to report to the IRS information about foreign entities in which US taxpayers hold a substantial ownership interest.

Intergovernmental cooperation agreements (IGAs) have been made for the implementation of FATCA. The IGAs have been split into two models;

Model I framework was released at the end of July 2012 and addresses conflicts between local laws and FATCA. FFIs in countries under the Model I framework are required to submit information on US account holders through their own governments rather than to the IRS directly. Under the IGAs there is a reciprocal arrangement for the US to report back the accounts of nationals that are in held in the US for any FACTA partner. UK, France, Germany, Italy and Spain have all committed to the Model I framework requirements. E.g. UK to report to HMRC who pass the information onto the IRS; who in turn reciprocate any relevant information (under FATCA) of UK account held in the US.

Model II framework recognises similar objectives to Model I however FFIs in that country will report directly to the IRS and not through their respective government. The national tax authorities in the respective country will be required to provide additional information at the IRS’ request only. No draft of the Model II framework has been circulated although both Switzerland and Japan have made joint statements with the US on FACTA compliance

When did FATCA start?

FATCA was enacted in 2010 as part of the HIRE Act but is effective 1 January 2013, although withholding does not start until 1 July 2014. For fixed or determinable annual or periodical (FDAP) payments made on or after 1 January 2014, FACTA withholding will apply. FATCA withholding for FDAP and gross proceeds will begin 1 January 2017. No FACTA withholding will be applied to pass thru payments until after 1 January 2017.

Who does FATCA impact?

Certain USA taxpayers holding financial assets outside the USA and FFIs.  The definition of an FFI is very broad and includes banks, custodians, brokers, many types of funds and insurance companies.

How will FATCA impact you?

FATCA includes the following:

  1. It requires foreign banks to find any American account holders and disclose their balances, receipts, and withdrawals to the US Internal Revenue Service (IRS), or be subject to a 30% withholding tax on income from US financial assets held by the banks.
  2. Owners of these foreign-held assets must report them on a new Form 8938 along with US tax returns if they are worth more than US $50,000; a higher reporting threshold applies to overseas residents. Account holders would be subject to a 40% penalty on understatements of income in an undisclosed foreign financial asset.
  3. It closes a tax loophole that investors had used to avoid paying any taxes on dividends by converting them into dividend equivalents.

The reporting requirements are in addition to reporting of foreign financial assets to the US Treasury Department, particularly the “Report of Foreign Bank and Financial Accounts” (FBAR) for foreign financial accounts exceeding US $10,000 required under Bank Secrecy Act regulations issued by the Financial Crimes Enforcement Network (FinCEN).

Related regulations

If you are affected by the this regulation you may also be affected by these:

Where can you find out more

DBFS, a partner of UnaVista, have written a article to explain in more detail how UK firms will be affected by FATCA. Please view the article here.

How UnaVista can help you with FATCA?

UnaVista can assist you with a number of regulations, so that you don’t have to build separate solutions for each problem, future regulations can then be catered for through the platform when required. The specific way UnaVista can help you with FATCA include:

  • Accurate Compliance; Assist FFIs with the identification of US taxpayers (either holding financial accounts or with a substantial ownership interest in a foreign entity) and execute due diligence procedures by providing a single customer view and structured workflow process for determining FATCA eligibility.

  • Timely and precise calculations; UnaVista can calculate the annual closing balances of FATCA eligible accounts prior to the disclosure deadline (i.e. using starting balances and associated cash transactions).

  • Efficient regulation exception handling; Implement business rules for the identification and management of FATCA exceptions whereby US source income payments need to be withheld.

  • Enhanced reporting; Automated generation of annual FATCA reports for the disclosure of: - FATCA eligible account holders and foreign entities - Withheld payments of US source income (FATCA exceptions)

  • Accurate audit trail; Provision of a fully audited approval process of annual FATCA reports (either direct to the IRS or via approved foreign governments).

 

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