Increasingly, the Foreign Account Tax Compliance Act (FATCA) passed by Congress is generating headlines around the world as its implications become clear as the US tries to find its taxpayers who may be hiding financial assets abroad.
But what does the bill mean?
Here’s our brief FAQ explaining more.
What is FATCA?
FATCA compels foreign financial institutions (FFI) to reveal whether a US resident has an account with them. The FFI then has to reveal what assets are held in any account.
What problems do FFI’s have?
Under their own country’s law, it would be illegal for many FFIs to reveal that information because the revelation would breach data and privacy laws. As a consequence, FATCA is being implemented at government level so the FFI tells their government the information and that is then traded with the US tax authorities.
When is FATCA implemented?
What is an FFI?
Under FATCA, there is a fairly wide definition of the term. A FFI is deemed to be an institution that is primarily engaged in the business of investing, reinvesting and those trading in securities, partnership interests or commodities.
Which financial sectors are FFIs in?
Again, the agreement is something of a catch-all and covers the obvious targets such as banks and insurance companies as well as broker-dealers, pension funds, property and hedge funds.
It also includes trust companies and private equity funds as well as clearing organisations and investment vehicles such as securitisation vehicles.
What if the FFI doesn’t comply?
There is a penalty under FATCA for non-disclosure of information about US taxpayers. The US will withhold 30% of US source income being made to a non-US FFI.
What must the FFI do?
All FFIs must register with the US Internal Revenue Service. However, they cannot reveal information directly to them and it must be done at a government level. Not registering will see the FFI being viewed by the US as being ‘non-FATCA compliant’ and liable to the withholding penalty.
Are all accounts liable to be revealed?
No, FATCA is a complex piece of legislation and, in addition, there are bi-lateral agreements between the US and many countries (including the UK) which specify which accounts are exempt.
What will the FFI reveal under FATCA?
Essentially, the FFI will have to disclose all ‘financial accounts’ of anyone considered to be a US resident or citizen. This term also extends to US shareholders in a UK corporate as well as deposit and custodial accounts and cash value insurance contracts. The information includes names and address and the year-end account value.