The fundamentals of FATCA

The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act in an effort to combat tax evasion by US persons holding investments in offshore accounts. It was established primarily to identify those with offshore assets who either do not prepare and file their taxes as required or file incomplete and inaccurate returns. After more than two years since its conception, the complete FATCA regulations were issued by the US Treasury Department and Internal Revenue Service (IRS) on Jan. 17, 2013.

The legislation in essence makes foreign financial institutions (FFIs) quasi agents of the IRS. An FFI is defined as any non-US financial institution that accepts deposits, holds financial assets for others, invests, reinvests, or trades in securities, partnership interests, or commodities, or any interest in such. As can be seen from the below diagram, this includes a number of categories of financial institutions.

Foreign financial institutions (FFIs)
Foreign financial institutions (FFIs)

It is important, therefore, that these FFIs are aware of and understand their obligations under FATCA and make a determination regarding whether they intend to comply and what this involves and, if not, the implications of such a decision.

Also affected by FATCA are nonfinancial foreign entities (NFFES). An NFFE is a foreign entity that is not a financial institution. NFFEs with substantial US owners have specific reporting requirements under FATCA. NFFEs without substantial US owners are wise to know the FATCA rules for planning and compliance purposes.

The evolution of FATCA

The issues of incomplete and inaccurate tax filing, tax avoidance, and tax evasion are not unique to the US. In fact, many other regions such as the United Kingdom, South Korea, India, Russia, and Europe, which have an extended reach to certain types of assets and income held offshore from a taxation perspective, are unable to confirm the completeness and accuracy of returns filed by their nationals. They, too, stand to benefit from the international exchange of information for tax purposes.

Implications of noncompliance

Noncompliance with FATCA, if you are an FFI, will result in a 30 percent withholding imposed on payments of US-source funds to you and your investors or customers. In addition, the reputation of your entity and the jurisdiction within which you operate will be at risk.

If you are an NFFE, noncompliance with FATCA could result in 30 percent withholding imposed on any expected payments of US-source funds.

Withholding starts generally with payments made on or after July 1, 2014. Withholding on gross proceeds from the disposition of any property of a type which can produce interest or dividends from sources within the US (e.g., US stocks, bonds, and real estate) begins with payments made on or after Jan. 1, 2017. The first reports from participating foreign financial institutions (PFFIs) are due March 31, 2015, and only with respect to the 2014 calendar year (for US accounts identified by Dec. 31, 2014).

Direct registering and reporting to IRS

If you are an FFI and wish to become a PFFI, you will need to register online using the secure FATCA Registration Portal. Upon registration, the PFFI will be issued a Global Intermediary Identification Number (GIIN), which would be shared with the PFFI’s withholding agents to evidence compliance. The GIIN also could eventually be used by the PFFIs to report to local governments under Model 1 IGAs.

We can help

Baker Tilly has experienced professionals with years of experience working for the IRS ready to assist you with your FATCA concerns and can help you form FATCA implementation plans. We provide FATCA compliance services tailored to your specific needs. Please contact your Baker Tilly advisor or send an e-mail to tax@bakertilly.com.