It’s a fact – FATCA is here. What is FATCA? How does it impact you or your company? If FATCA does apply, are you or your company compliant with its various requirements? These are just a few of the questions that individuals and companies must address as they relate to the provisions of FATCA, short for the Foreign Account Tax Compliance Act.
The primary intent of FATCA is to deter and detect tax evasion by U.S. taxpayers via direct or indirect offshore investments. Several enforcement measures are highlighted, including the requirement for taxpayers to disclose their offshore asset holdings and the requirement for foreign financial institutions (FFIs) to identify and report on U.S. persons or entities that hold such accounts.
The requirement for U.S. taxpayers to disclose their offshore assets is not a new one. Every person who has financial interest in or signature authority over any foreign financial account, in a foreign country, is required to submit FinCEN Form 114, Report of Foreign Bank and Financial Accounts, if the aggregate value of those financial accounts exceeded a given threshold (currently $10,000) at any time during the calendar year.
There are many objectives of this informational disclosure. First and foremost, disclosure of the non-U.S. account alerts the IRS to the taxpayer’s offshore activity. In addition, from a compliance perspective, if any bank or investment accounts are held overseas, the taxpayer is required to report on their tax return the income earned from the offshore accounts.
While the requirements of FinCEN Form 114 continue, Internal Revenue Code Section 6038D recently was enacted to provide enhanced compliance reporting. This enhanced reporting and disclosure is accomplished via IRS Form 8938, Statement of Specified Foreign Financial Assets. This form, usually filed with the annual tax return, reports one’s specified foreign financial assets if the total value of all such assets held exceeds the respective reporting threshold.
Although the principal focus of the FATCA legislation is tax compliance by U.S. persons who have accounts with FFIs, other new reporting and tax withholding requirements have been instituted. In yet another attempt to enforce compliance, FATCA added a new Chapter 4 to the Internal Revenue Code.
The new chapter imposes a 30% withholding tax on certain payments made to both FFIs and non-financial foreign entities (NFFEs) that do not comply with FATCA provisions. Since many FFIs and NFFEs have substantial investments in U.S. assets, the threat of a 30% withholding tax is a significant one.
As with any general rule, there are exceptions. Given FATCA’s overall complexity and potential negative impact on global markets, Congress provided guidelines under which certain FFIs and NFFEs would be exempt from required withholding, and granted both the IRS and Treasury authority to provide certain exceptions to FFI agreements and requirements. Recent IRS regulations also provide for phased implementation of certain FATCA provisions.
For many companies, however, a lot of homework remains to understand and comply with FATCA. Companies should ask themselves –
- Does FATCA apply to my company? If so, who will take responsibility for FATCA?
- What service lines and functions are impacted?
- What procedures and reporting requirements are needed?
- What is the budgeted impact of FATCA on the organization?
With our global economy, the concept of offshore compliance is an increasingly hot topic worldwide as governments step up requirements to increase revenues. The various facets of FATCA are challenging and its regulatory impact can be overwhelming. Companies should carefully review the regulations to ascertain the specific impact and ensure compliance.