Foreign Account Tax Compliance Act (FATCA) is a new US law enacted as a part of HIRE Act (Hiring Incentives to Restore Employment Act) on March 18, 2010. The purpose of FATCA is to ensure that US can identify and collect the appropriate tax from US Persons holding financial assets outside the USA.

FATCA requires the Foreign Financial Institutions (FFI’s) to enter into an agreement with IRS to report information of their clients’ financial accounts held by US Persons, or by Non-Financial Foreign Entities (NFFE’s) in which US Persons hold a substantial ownership interest. The law imposes 30% withholding tax on all US source income in case of non-compliance with FATCA.

FATCA will co-exist with other tax laws and reporting requirements.

Goal of FATCA
The goal of FATCA is to prevent tax evasion by US Persons. FATCA will achieve this by imposing a 30% withholding tax on payments of US source income (withholdable payments) to a FFI or a NFFE, unless certain reporting obligations are met. These reporting obligations vary depending on whether the payee is an FFI or an NFFE.

Withholdable payments under FATCA
The withholding tax will be imposed on payments which will include:
  • Payments from interests, dividends, premiums, annuities etc. and other periodic payments from US sources
  • Gross proceeds from the sale or disposition of property of a type that can produce interest or dividends from sources within US.

Impact of FATCA
FATCA impacts the following entities as under:
  • FFIs: To enter into an agreement with the IRS to disclose all US accounts.
  • NFFEs: To disclose/certify their substantial ownership status (10% or more) to the respective withholding agent.
  • US Financial Institution (USFIs): USFIs need not enter into an agreement with IRS, but they have certain due diligence obligations to assess compliance status of FFIs or NFFEs for withholding purposes while making payments/disbursements.

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Withholding agent
All persons, in whatever capacity acting, having the control, receipt, custody, disposal, or payment of any withholdable payment are categorized as Withholding Agents under FATCA.

A USFI acting as withholding agent will need to determine whether an FFI or an NFFE is compliant/non-compliant for withholding purposes. Likewise, an FFI can also be a withholding agent with respect to other FFIs or NFFEs to determine the withholding on any passthrough payments.

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Minimum threshold for reporting a US financial account for FFI's
All US financial accounts with an average value of US $50,000 or more have to be reported to the IRS.

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Qualifying interest of holding (%) by US person for disclosure by NFFE's
Accounts of all entities (NFFE’s) held by US persons for 10% or more directly or indirectly have to be disclosed to the respective FFI/ Withholding Agent.
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Key dates
Agreement with IRS by FFI: By June 30, 2013 (effective date: January 1, 2014)

First Reporting of US accounts: Before Mar 31, 2015

Commencement of withholding: After Jun 30, 2014

Note: These dates are for compliance with FATCA, reporting, and the commencement of withholding in general. There are different timelines for reporting different thresholds starting from $50,000 and also the types of accounts (Existing, New, etc.).
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Reporting, due diligence, and disclosures requirements
For FFIs, the due diligence and reporting requirements depend on the average account value. The most detailed information required to be reported will include:
  • Name, Address, US Tax Identification Number (TIN), Account number and Account balance
  • Income and withdrawals
  • Gross proceeds

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Advantages of complying with FATCA
The general advantages of compliance with FATCA include:
  • Helping to avoid 30% withholding tax on all US source payments.
  • Helping to avoid any 30% withholding that might arise in future for the investments in US Assets and in any passthrough payments.
  • Helping to avoid unwanted attention from the IRS that might infer that the account holder is trying to evade taxes.
There is a possibility of other countries introducing legislation similar to FATCA, which would allow automatic exchange of information relating to their citizens or corporations.
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Intergovernmental agreements and their implications
FATCA has raised a number of issues, including that FFIs established in some countries may not be able to comply with reporting, withholding, and account disclosure requirements because of legal restrictions. Eight countries (USA, France, Germany, Italy, Spain United Kingdom, Switzerland and Japan) have made joint statements to enter into intergovernmental agreements.

In the recent weeks, the US announced that it is in the process of finalizing, is actively engaged in dialogue and is working to explore options for intergovernmental engagement / bilateral agreements with 50 countries, on FATCA. The UK, Mexico, Denmark and Ireland have concluded agreements to facilitate the FATCA disclosure and reporting, most of them based upon reciprocity.

Key Features:
  • Reciprocal arrangement of collection and exchange of information on an automated basis
  • Enhance compliance and facilitate enforcement to benefit all parties
  • Address legal impediments to compliance like the data privacy, bank secrecy laws etc.
  • Simplify implementation and reduce costs
  • FFIs to disclose information to the local tax authorities, local authorities to pass the information to IRS
  • FFIs to be categorized as deemed compliant and
  • No withholding tax applicable
More countries are expected to eventually enact laws like FATCA, which would have similar obligations.
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FATCA: Foreign Account Tax Compliance Act
HIRE Act: Hiring Incentives to Restore Employment Act
FFI: Foreign Financial Institution
NFFE: Non-Financial Foreign Entity
USFI: United States Financial Institution
IRS: Internal Revenue Service
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US Financial Account:
  • Depository account
  • Custodial account or
  • Equity or debt interest in Financial Institution or any equity or debt interest which constitutes a Financial Institution
Foreign Financial Institution
(FFI) is a financial institution which is a foreign entity that:
  • Accepts deposits
  • Holds financial assets for the account of others or
  • Is engaged primarily in the business of investing, trading in securities, partnership interests, commodities, or any interest as listed above
Non-Financial Foreign Entity
Any foreign entity which is not a financial institution

Recalcitrant Account
  • Fails to comply with reasonable requests for the information required by the IRS
  • Fails to provide a waiver to report the required information to the IRS.
US Person
  • A citizen or resident of the United States
  • A domestic partnership
  • A domestic corporation
  • Any estate (other than a foreign estate within the meaning of 7701(a)(31)) or
  • Any trust if:

  • • A court within the United States is able to exercise primary supervision over the administration of the trust and
    • One or more US persons have authority to control all substantial decisions of the trust
    • Any other person that is not a foreign person.
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The rules and procedures in the IRS notices may change in the final regulations. This document is prepared for general information purposes only. Amicorp Group does not provide tax or legal advice to its clients. Any opinions contained herein should not be construed or interpreted as advice provided by Amicorp Group.

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