FATCA – now in effect from 1 July 2014

July 2nd, 2014 by Stephen Jones Leave a reply »

Does the Foreign Account Tax Compliance Act (FATCA), affect you? The legislation came into full effect on the 1st of July 2014 and has many implications, particularly for US expatriates and for financial institutions with which they deal.

FATCA, a U.S. tax avoidance measure that requires foreign (non- U.S.) financial institutions (FFIs) to identify, report on and, in some circumstances, withhold on payments to account holders. The point of FATCA is increase transparency for the IRS with respect to U.S. persons that may be investing and earning income through non-U.S. institutions. FATCA imposes tax withholding where the applicable documentation and reporting requirements are not met.

U.S. taxpayers owning financial assets in excess of $50,000 in foreign accounts must report those assets every year on a new Form 8938 to be filed with the 1040 tax return.

The law requires foreign financial institutions (FFIs) to enter into an agreement with the Internal Revenue Service to identify their U.S. account holders and to disclose the account holders’ names, tax identification numbers, addresses and the transactions of most types of accounts.

FFI’s are now required to report the following:
1) The name, address and U.S. tax identification number (TIN) of each account holder that is a specified U.S. person;
2) In the case of any account holder that is a U.S. entity with one or more U.S. owners, the name, address and TIN of each substantial U.S. owner of such entity;
3) The account number;
4) The year-end account balance or value; and
5) Gross receipts and gross withdrawals or payments from the account.

If an FFI does not enter into an agreement with the IRS, all relevant U.S.-sourced payments, such as dividends and interest paid by U.S. corporations, will be subject to a 30 percent withholding tax.

Many Americans residing overseas are faced with ‘banking lock-out’ because financial institutions have in some cases chosen to eliminate their US client basis to minimize their exposure to FATCA reporting requirements, withholding fees and potential penalties.

While there is speculation that this law will make it less desirable for foreigners to do business with Americans and even a reduced desire to hold dollar-based assets there is still a need for Middle East FIs to address this reporting requirement.

US citizens working here should seek independent financial advice or speak to a tax advisor for more information and visit the IRS website – www.irs.gov/

(From Notice 2014-33: Comments received after the publication of the temporary Chapter 4 regulations have indicated that the release dates of the final Forms W-8 and accompanying instructions present practical problems for both withholding agents and FFIs to implement the new account opening procedures beginning on 1 July 2014. In consideration of these comments, the US Treasury and the IRS intend to amend the Chapter 4 regulations to allow a withholding agent or FFI to treat an obligation held by an entity that is issued, opened, or executed on or after 1 July 2014, and before 1 January 2015, as a pre-existing obligation for purposes of implementing the applicable due diligence, withholding, and reporting requirements under Chapter 4. The proposed amendments to the Chapter 4 regulations will only be available to obligations held by entities. )

http://www.irs.gov/pub/irs-pdf/p5124.pdf This user guide FATCA XML V1.1 sets out the xml schema and the information required in each data element.

Once FFIs register with the IRS through the agency’s website, they will receive a notice that the registration has been accepted and will be issued a Global Intermediary Identification Number (GIIN), to be used for reporting purposes. Approximately 77,000 banks and financial institutions from 70 countries have already registered, according to news reports. Reuters reported that more than 500 U.S. businesses have also registered, including Citibank and JPMorgan Chase. As of June 13, 2014, 36 nations had signed agreements with the IRS, including Australia, France, Germany, Japan, Mexico, South Africa, the United Arab Emirates and the United Kingdom. Many places where Americans have traditionally hidden assets, including Switzerland, the Cayman Islands and the Bahamas, have signed agreements as well. Forty-two other nations have reached “agreements in substance.”

The IRS issued a notice in May 2014 announcing that calendar years 2014 and 2015 will be regarded as a “transition period” for FATCA enforcement. The transition period is “intended to facilitate an orderly transition” for financial institutions struggling to achieve FATCA compliance, according to the IRS.

Take note that the July 1, 2014, effective date is not postponed and the legal obligations imposed by FATCA have not changed. “An entity that has not made good-faith efforts to comply with the new requirements will not be given any relief from IRS enforcement during the transition period,” the notice states.

The IRS is just letting the international financial community know that a good-faith attempt at compliance will be acceptable until January 2016. Instead of aggressive policing of reporting accuracy, the IRS may check on the status of FFIs’ filing of W-8 and W-9 forms and take into account whether a withholding agent has made reasonable efforts to modify its account opening practices and procedures.


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