FATCA

The Foreign Account Tax Compliance Act (FATCA) was signed into law in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. Its purpose was to ensure that US investors with financial accounts outside the US pay the required income tax. At the time it was estimated that $100 billion in tax revenue was lost each year as a result of offshore tax abuses. The US Treasury and the Internal Revenue Service (IRS) released the final version of the regulations on January 17th 2013.

Under FATCA Foreign Financial Institutions (FFIs) must report to the IRS on their US account holders. If they fail to report to the IRS they will be subject to a 30% withholding on any US sourced income.

US sourced income includes:

  • Interest and dividend payments
  • Other fixed or determinable, annual or periodical (“FDAP”) payments
  • Gross proceeds from the disposition of property of a type that can produce US-source FDAP income
  • “foreign pass-thru payments,” which the final regulations reserve defining
  • An FFI includes any non-US entity that:

    • Accepts deposits in the ordinary course of its business, or
    • Holds financial assets for the account of others as a substantial part of its business, or
    • Is engaged primarily in the business of investing, reinvesting or trading in securities, commodities, partnerships or any interest in such
    • The US Treasury has defined two models for Intergovernmental Agreements (IGAs) that make it easier for FFIs to report on their account holders to the IRS and reduce conflicts with local regulatory authorities.

      Model 1 IGA
      FFIs in partner jurisdictions will be able to report information on US account holders directly to their national tax authorities, who in turn will report to the IRS (list of Model 1 IGA countries). Within the Model 1 IGA structure there are two types of partner jurisdiction:

      1. Those countries that have a signed intergovernmental agreement with the United States; and
      2. Jurisdictions that have reached agreements in substance with the United States and can be treated as having an agreement in effect.

      Model 2 IGA
      FFIs will report information directly to the IRS rather than their local jurisdictions (list of Model 2 IGA countries). Within the Model 2 IGA structure there are two types of partner jurisdiction:

      1. Those countries that have a signed intergovernmental agreement with the United States; and
      2. Those jurisdictions that have reached agreements in substance with the United States and can be treated as having an agreement in effect.

      The remaining milestone in 2015 for FFIs is September 30. Reporting begins for FFIs in Model 1 IGA jurisdictions. The following items must be included in the report:

      1. Account holder’s name;
      2. Account holder’s U.S. taxpayer identification number (TIN);
      3. Account holder’s address;
      4. Account number;
      5. Account balance or value; and
      6. For accounts held by recalcitrant/non-consenting account: report aggregate number and balance or value.

      In 2016 the first milestone occurs on March 31. Reporting begins for FFIs in non-IGA jurisdictions and FFIs in Model 2 IGA jurisdictions. The report must include items 1-6 listed above and an additional item:

      7. Income paid

      Last updated 18th August 2015

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