FATCA Foreign Account Registrations

The Foreign Account Tax Compliance Act, FATCA, is an enacted US legislation aimed at reducing tax evasion by US citizens based abroad.  The massive reporting law will compel foreign finance institutions to pass on financial information to the US Internal Revenue Service (IRS) on the accounts of the US persons.  The information to be reported to the IRS will also include that of entities with substantial US persons’ ownership. The key factor is that these entities must have a “withholdable” income from US sources.  These income sources also cover the gross proceeds that the entities may make from the sale or disposition of any US property that may raise dividends or interest. The FATCA applies not just to the foreign financial institutions but also the non-financial institutions such as the multi-nationals. The FATCA Foreign Account Registrations are already open and can be done online even though the implementation of the law has seen further delays by the IRS.

The IRS is targeting the foreign income and offshore account IRS disclosures in order to stem what it perceives as an abuse of the system by entities based outside the US.  The requirement for the foreign financial institutions or FFIs will be to report to the IRS on the offshore accounts of US persons holding more than $50,000.

While the law subjects many non-financial institutions to the FATCA provisions, a core part of the law is actually targeted at the FFIs. The FATCA will literally require the FFIs to spy on and rat out their US clients to the IRS.  This might attract some quiet grumbles from the FFIs but they have no choice to comply with provision as the penalties are quite severe. For example, the FFIs could see up to 30% withholding tax imposed on their US incomes as part of the penalties. Given the ramifications of the penalties-being practically frozen out from the financial markets-many FFIs would rather comply with the FATCA provisions.

The US government has negotiated intergovernmental agreements with several governments to ensure smooth financial institutions FATCA IRS registrations.  Foreign financial institutions with any of these kinds of accountholders will be bound by the FATCA provisions:

  • A citizen of the United States
  • A US tax resident
  • US entities that are defined as US persons
  • Some kinds of non-US entities under the control of the citizens of the US or US tax residents.
  • Some kinds of “non-participating” financial institutions

The Foreign Financial Institutions

There are several kinds of foreign financial institutions or FFIs that will be directly subjected to the FATCA, unless the US expressly exempts them from FATCA reporting. These include the foreign banks, mutual funds, custodial institutions, the hedge funds, the private equity or PE funds, the insurance companies and the superannuation funds. The FATCA Foreign Account Registrations are currently open and are beginning to be accepted by the IRS. It is always important to begin the process as early as possible due to the very lengthy due diligence process.

The Effect of the FATCA on Foreign Financial Institutions

If an FFI has no FATCA exemptions, such will be required to register and make annual financial reports to the IRS regarding certain accounts that are invested with them. US citizens and green cardholders living outside the US will be reliable to either the FATCA or the existing tax reporting and withholding regime that is currently in place in addition to the tax regime of their host nation. This makes the tax terrain a lot more complex for the US residents residing outside the US and with some “withholdable” income sources from the US as defined in the IRS tax code. It is therefore important for a good tax advisor to help on the tax obligations under the FATCA regime and the general compliance with tax regime of both the US and the host country.

FATCA Information for Foreign Financial Institutions and Entities

The FATCA Information for Foreign Financial Institutions and Entities is available at the IRS website. It is important for the foreign financial institutions to break down the FATCA requirements to their clients so that they can better understand their obligations under the new tax laws.  The FFIs can, for example, create FATCA FAQs that break down the process and provide information in a clear and concise manner on the new tax reporting and withholding regime.  The FFIs should determine whether they qualify for exemption so as to avoid the 30% withholding tax due to non-compliance. Upon registration in the FATCA Registration Website,  the FFI will get a Global Intermediary Identification Number or GIIN that is issued by the IRS.  The FATCA Foreign Account Registrations service is available online 24 hours a day.

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