This FATCA Frequently Asked Questions (FAQs) can assist you to get some FATCA answers so as to better understand and comply with the new tax reporting and withholding regime. These FATCA questions and answers will offer you some good insight about the new provisions:
What is FATCA?
FATCA is an acronym for the Foreign Account Tax Compliance Act, a set of provisions that were introduced in October 2009 and signed into law in March 2010 as part of Hiring Incentives to Restore Employment (HIRE) Act and came into effect in January 2013. The implementation of the provision however began in January 2014. The provision was introduced to curb tax abuses by US persons holding off-shore accounts. Under the new FATCA rules, the foreign financial institutions (FFIs) must give the US Internal Revenue Services, IRS, information on some US persons holding the offshore accounts and the non-US entities must also provide information on the US citizen owners. The FATCA has introduced a new chapter in the US tax code-Chapter 4 dedicated to mitigating the perceived tax abuses by US citizens with accounts invested overseas.
When does the implementation of the FATCA begin?
The withholding of the FATCA regime began in January 2014. This will be applicable for the fixed or annual determinable or periodical payments, the so called FADP payments that are made after 1 January 2014. The withholding for the FADP and gross proceeds begins in January 2015. The same timeline set for the passthru payments.
Who does the FATCA regime impact?
Basically, the FATCA will impact anyone that has a US income source. The net will be quite wide covering companies that are operating in the financial sector and those that are not involved in this sector. These will include FFIs, the US withholding agents, and the US multinational companies amongst others. The FFIs will however feel the full force of the FATCA.
Does FATCA supplant the existing US tax reporting and withholding regime for the nonresidents?
It doesn’t. The two will be mutually exclusive for each account. Either the FATCA will apply or the existing US tax reporting and withholding regime will roll into action. There are however additional layers of complexity and requirements that have been added to tax reporting for nonresidents and it is important to contract a good tax analyst to help you sieve through the new complexities. The IRS will be working to eliminate duplicative tax reporting and withholding.
How can you prepare for the FATCA regime?
There are several steps that you can take to prepare for the FATCA tax reporting and withholding regime. The first step is to assign responsibility to someone in your organization that will be handling all FATCA-related matters for your organization. Put in place some steering committee for all the businesses in your portfolio that will be impacted by the new FATCA regime. The last step is to assess your business to determine how it will be impacted by the FATCA and the budget allocations that will be required to comply with the new provisions.
When should you get prepared?
The due diligence procedures must have been instituted from the effective date of the new FFI agreement. The pre-existing private banking accounts holding at least $500,000 must have had a due diligence performed inside one year of the effective date of the FFI agreement. This applies for the Section 1.A.2 of Notice 2011-34 of the provision. For the pre-existing accounts holding less value, the due diligence procedure should be performed by 31 December 2014 of the first anniversary of the effective date of the FFI Agreement. The requirement for all the other accounts is that the due diligence be performed inside two years after the effective date of the agreement.
Are there any exceptions for certain countries?
None exists at the moment.
Is a country that has an existing tax treaty with the US exempted from FATCA?
No. The FATCA does not exempt any entities in countries that have signed an exchange of information treaty or entered into a double tax relief with the United States. In fact, it is the compliance with the FATCA that will entitle those entities to the benefits accruing from the treaty with the US.
Does closing the accounts of the US account holders exempt an entity from FATCA?
Not necessarily. The FATCA is not based on the fact that an FFI has US clients. The provision is actually designed for non-US entities. So an FFI closing its non-US accounts does not exempt it from the FATCA regime.
Which payments will be subject to FATCA?
The “withholdable payments”. These refer to payments which:
- Rents, Interest payments, dividends, salaries, royalties, annuities, licensing fees along with other forms FDAP income, profits and gains amongst others as long as the sources of the payment is the US.
- The gross proceeds arising from sale or disposition of United States property which can generate interest or dividends.
- The FATCA will also cover certain categories of passthru payments. The passthru payment value is given by the value of the “non-withholdable payment” multiplied by the “passthru payment percentage” of the given entity that is covered by the FATCA regime. You can determine the “passthru payment percentage” from the Notice 2011-34 of the FATCA provision.
Are the foreign exchange transactions subjected to FATCA?
The FATCA regime seems to only cover the sale or disposition of a US property capable of generating interest or dividends. While gain from foreign exchange transactions are usually reported as gross proceeds, it seems these are not subject to the FATCA provisions although this could change in the future with new regulations.
Are remittances from the US subjected to FATCA?
No. However money that has been transferred into US accounts may be subject to the FATCA provisions.
What is the difference between the FATCA withholding and the withholding that is carried out by the US Financial Institutions?
FATCA applies to a different type of income that is different from that to which the current withholding regime is applied and is applied irrespective of any US treaty and/or statutory exemptions.
What if an entity shifts all direct investments from the US?
In the instance that a non-US entity does not-directly or indirectly-receive any withholdable payments from US-based investments or sources, it will not be subjected to FATCA provisions.
How does the FATCA regime treat joint accounts owned by a US and a non-US person?
Any joint account with a US owner is treated as a US account. As a result, the entire account will be subjected to the FATCA provision.