Wednesday, 29 March 2017
1. What is FATCA?
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.
2. Who is impacted by FATCA?
Any entity making a payment of U.S. source income must consider whether it is subject to FATCA. FATCA may apply to both financial and non-financial operating companies. Due to this breadth, FATCA impacts virtually all non-U.S. entities, directly or indirectly, receiving most types of U.S. source income, including gross proceeds from the sale or disposition of U.S. property which can produce interest or dividends.
U.S. entities, both financial and non-financial, that make payments of most types of U.S. source income to non-U.S. persons will also be impacted as they may now be required to withhold a 30% tax on that income paid to a non-U.S. person under FATCA. This will require the U.S. entities to maintain documentation on those non-U.S. persons and also track how those persons are classified under FATCA.
3. What is a Foreign Financial Institution?
A foreign financial institution (FFI) is any non-U.S. entity that:
4. What is an FFI Agreement?
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:
5. What are the consequences for a non-participating FFI (an FFI that does not enter into an FFI agreement)?
A non-participating FFI will be subject to 30% withholding on each payment that is routed through a participating FFI.
6. How can I verify if an FFI has registered and therefore 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.
7. What is a United States Account (U.S. Account)?
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).
8. What is a substantial U.S. owner?
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.
9. What are the main obligations imposed by FATCA on the FFI:
FATCA imposes three main obligations FFIs:
10. What information must an FFI report on U.S. taxpayers who are not exempted?
11. What are withholdable payments?
“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.
12. What is the definition of a U.S. source payment?
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.
13. What is the effective date of the FFI Agreement?
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.
14. What is “New Customer Onboarding”?
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.
15. Who are “Pre-existing account holders”?
Account holders that became customers of the FFI before July 1, 2014.
16. Who are “new customers”?
Account holders that become a customer of the FFI from July 1, 2014 onward.
17. How does an FFI determine their “Pre-existing account holders”?
Through an electronic search of the FFI’s database based on the U.S. indicia.
18. What is considered indicia of U.S. status?
FATCA lists seven indicia of U.S. status:
19. What documentation must an FFI collect if it has an account with indicia of U.S. status
Notice 2011-34 provides details of the required documentation associated with each indicia of U.S. status:
20. If a joint account is held by a U.S. person and a non-U.S. spouse, is it considered 50% U.S. or 100% U.S.? Does it make a difference if they are not U.S. residents?
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.
21. What is a “recalcitrant accountholder”?
A “recalcitrant accountholder” is any accountholder that:
22. What are the consequences for a “recalcitrant accountholder”?
A “recalcitrant accountholder” is any accountholder that:
23. What happens with the money that is withheld by a FFI?
The money that is withheld by a FFI, must be transferred to the U.S. Treasury department.
24. My country has privacy or secrecy laws that prohibit sharing customer information with the U.S. government. What am I expected to do?
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.