FATCA - Frequently Asked Questions
What is FATCA?
FATCA stands for the Foreign Account Tax Compliance Act (FATCA) is a US regulation that was first introduced by the United States Department of Treasury (Treasury) and the US Internal Revenue Service (IRS) as part of the HIRE Act in 2010.
The FATCA regulations aim is to combat tax evasion by preventing US taxpayers who hold assets in foreign financial institutions (FFIs) and other offshore accounts from avoiding their tax obligations. Under the FATCA requirements, these FFIs are obligated to identify US persons that hold assets abroad and regularly submit or report this information on these financial accounts.
As early as 2014 countries from across the globe have committed to improving international tax compliance and implementing the FATCA rules worldwide by signing Intergovernmental Agreements (IGAs) with the US.
IGAs stipulate that FFIs, located in specific jurisdictions, will have to perform tax due diligence by identifying and reporting US accounts to the relevant tax authorities unless they have received an exemption. The two model IGAs were developed by the US Government in collaboration with other international governments to implement and enforce FATCA compliance policy worldwide.
What Is A Foreign Financial Institution?
Under FATCA IRS defines a foreign financial institution also known as an FFI, any foreign or non-US entity which accepts deposits for ordinary banking or businesses, holds assets or is engaged in the business of investing, reinvesting or trading of securities, partnership interests or other commodities.
Under the FATCA compliance policy this includes but is not limited to the following entities:
Depository institutions (eg. Banks)
Custodial institutions (eg. Mutual funds)
Investment entities (eg. private equity or hedge funds)
Certain insurance companies with cash value products or annuities
Direct reporting of non-financial foreign entities
What Are Specified Foreign Financial Assets?
Under FATCA IRS defines a Specified foreign financial asset as a foreign financial account or foreign non-account asset that is being held for investment (not trade or business). Under this definition, this would include;
Depository or custodial financial accounts being maintained by FFIs
Stocks or securities issued by foreign corporations
Financial instruments and investment contracts issued by a counterparty that is not a U.S. person
Any interest in a foreign entity
How Does FATCA Work?
Now that we have answered what is FATCA and understood the FATCA meaning, let's dive deeper into the intricacies of how FATCA compliance works.
FATCA enforces tax compliance by targeting non-compliance through withholding requirements that are imposed on foreign financial institutions and reporting requirements imposed on specified reportable persons/entities.
FATCA requirements stipulate that both certain U.S. taxpayers and certain FFIs must report specified foreign financial assets to the IRS. FATCA filing rules impose withholding requirements on financial institutions and information reporting requirements on specified persons.
Under the FATCA rules, FFIs and reporting financial institutions (RFIs) located in participating countries, will have to perform tax due diligence by identifying and reporting all relevant account information on all accounts held by U.S. residents or U.S. citizens to the relevant local tax authority.
Local tax authorities are then obligated to exchange this information with the International Revenue Service (IRS) beginning in 2015.
Which Countries Follow FATCA?
Below I have a global FATCA overview of all the participating countries and territories often referred to as jurisdictions that have signed IGAs and thus have FATCA obligations. FFIs in these countries would have FATCA requirement to do FATCA reporting on an annual basis.
In total there are 113 FATCA jurisdictions with signed IGAs including:
Algeria, Angola, Anguilla, Antigua and Barbuda, Armenia, Australia, Austria, Azerbaijan, Bahamas, Bahrain, Barbados, Belarus, Belgium, Bermuda, Brazil, British Virgin Islands, Bulgaria, Cabo Verde, Cambodia, Canada, Cayman Islands, Chile, China, Colombia, Costa Rica, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Dominica, Dominican Republic, Estonia, Finland France, Georgia, Germany, Gibraltar, Greece, Greenland, Grenada, Guernsey, Guyana, Haiti, Holy See, Honduras, Hong Kong, Hungary, Iceland, India, Indonesia, Iraq, Ireland, Isle of Man, Israel, Italy, Jamaica, Japan, Jersey, Kazakhstan, Kosovo, Kuwait, Latvia, Liechtenstein, Lithuania, Luxembourg, Macao, Malaysia, Malta, Mauritius, Mexico, Moldova, Montenegro, Montserrat, Netherlands, New Zealand, Nicaragua, Norway, Panama, Paraguay, Peru, Philippines, Poland, Portugal, Qatar, Romania, San Marino, Saudi Arabia, Serbia, Seychelles, Singapore, Slovak Republic, Slovenia, South Africa, South Korea, Spain, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Sweden, Switzerland, Taiwan, Thailand, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Turks and Caicos Islands, Ukraine, United Arab Emirates, United Kingdom, Uzbekistan and Vietnam.
Who Is Reportable Under FATCA?
Is FATCA reporting only for US citizens? Technically both account holders and withholding agents have FATCA requirements, however different FATCA forms are applied under different scenarios.
FATCA is not specifically targeting US citizens but rather US tax payers and these include both specified individuals and specified entities holding specified foreign financial assets.
Specified individuals with FATCA reporting obligations who need to fill out FATCA forms W9 include :
Resident aliens of the U.S. for any part of the tax year
Non-resident aliens who make an election to be treated as a resident alien for the purposes of filing a joint income tax return
Non-resident aliens who are bona fide residents of Puerto Rico, Guam, American Samoa, the Northern Mariana Islands, and the U.S. Virgin Islands.
It is worth keeping in mind that the reporting threshold may differ for those residents in the United States vs. those living in a foreign country.
Specified entities with FATCA reporting obligations include businesses that are created for the purpose of holding directly or indirectly, foreign financial assets. These entities would also need to fill out FATCA forms including the W8 series. These entities may include
Which Assets Are Exempt From FATCA Reporting?
Not all foreign assets held by foreign financial institutions are subject to FATCA withholding. Certain specified foreign assets can be exempt from FATCA withholding under 3 scenarios.
Scenario 1; if the participating FFI either has an arrangement with the IRS to take on specific obligations for due diligence, reporting and withholding. Scenario 2; if the FFI has been deemed compliant or complies. Scenario 3; if the FFI complies with an IGA.
Not all assets are considered to be foreign financial assets and therefore are also exempt from FATCA filing. These FATCA exempt assets that do not have to be reported include:
Financial accounts are maintained by a US payor when the US payor is in fact either a US Branch of an FFI, a foreign branch of a US FI or a foreign subsidiary of a US corporation.
A beneficial interest in a foreign trust or foreign estate, if you do not have knowledge of the interest therefore not including persons who have received a distribution from a foreign trust/estate.
An interest in a foreign government program that may include a social security or social insurance scheme.
A financial account or asset may also not be considered a specified foreign financial asset if fuels under Code Sec. 475(a) apply or elections under Code Sec. 475(e) or Code Sec. 475(f) are made with respect to the account or asset
How Can TAINA Help FFIs Be Compliant With The FATCA Regulations?
The rise in IRS enforcement and FATCA Compliance audits paired with the ever-changing legislation around FATCA has further increased the risk for financial institutions. Making it more important now than ever to address your FATCA validation process.
The TAINA Platform takes care of your FATCA compliance in a seamless end-to-end process whilst maintaining an up to date, robust and detailed CRS ruleset.
TAINA’s fully-automated FATCA and CRS Validation Platform can help financial institutions of all types lighten their compliance burden and prove their FATCA and CRS compliance whilst improving efficiency, reducing cost, mitigating risk and improving their overall customer and investor experience.
Using our flexible and lightweight platform you can automate and streamline your FATCA and CRS validation process whilst ensuring you have good year-end data that will result in clean FATCA and CRS reporting to tax authorities.
We would love to talk to you more about your current documentation validation process and how our award-winning FATCA and CRS Validation platform may add value to your organisation.