FATCA was designed to prevent U.S. citizens from evading taxes through the use of offshore accounts and to improve tax compliance involving foreign financial institutions (FFI). It is a potentially powerful new tool in the U.S. government’s campaign against offshore tax evasion and was prompted in part by the well-publicized prosecution of a large Swiss bank that facilitated U.S. tax evasion.
Broadly speaking, FFIs will be required to enter into an agreement with the IRS and disclose certain information regarding U.S. account holders or be subject to a penalty tax.
- Foreign banks and foreign financial institutions (FFI) are required to disclose to the IRS information about financial accounts held by U.S. taxpayers, including their balances, receipts, and withdrawals. Failure to comply will result in a 30% withholding tax on income from U.S. financial assets held by the banks or financial entities.
- U.S. taxpayers with foreign financial assets that exceed certain thresholds must report those assets to the IRS on Form 8938. Account holders would be subject to a 40% penalty on understatements of income in an undisclosed foreign financial asset.
- FATCA also closes a tax loophole that investors have used to avoid paying any taxes on dividends by converting them into dividend equivalents.
- Accepts deposits in the ordinary course of a banking or similar business;
- As a substantial portion of its business, holds financial assets for the account of others; or
- Is engaged (or holds itself as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest in such securities, partnerships interests, or commodities.
The FFI designation is quite broad. Thus, foreign banks, brokers, custodians and funds, including foreign mutual funds, funds of funds, exchange-traded funds, private equity and venture capital funds, other managed funds, commodity pools and hedge funds all qualify as an FFI.
Enters into a FFI Agreement (a “Participating FFI”) with the IRS under section 1471(b)(1),
Meets the necessary requirements prescribed by the Treasury Department and the IRS (a “Complying FFI”), or
Is excepted from application of FATCA(e.g. a governmental entity, foreign central bank)
Any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, and other fixed or determinable annual or periodical games, profits and income (FDAP income), if such payment is from sources within the U.S; and
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 U.S.
The name, address, and taxpayer identification number (TIN) of each account holder that is a specified U.S. person and, in the case of any account holder that is a U.S. owned foreign entity, the name, address and TIN of each substantial U.S. owner of such entity;
The account number;
The account balance or value; and
The gross receipts and gross withdrawals or payments from the account
First, if the FFI complies with such procedures as the IRS may prescribe to ensure that the FFI does not maintain US Accounts and the FFI meets such other requirements as the IRS may prescribe, with respect to accounts of other FFIs maintained by the first FFI.
Second, If the FFI is a member of a class of institutions with respect to which the IRS has determined that the application of the agreement/withholding provisions is not necessary.
The IRS will electronically post the first IRS FFI list in December 2013. The last date by which a FFI can register to ensure its inclusion on the December 2013 FFI list is October 25, 2013.