The Foreign Account Tax Compliance Act (FATCA) was enacted in March 2010 as part of The Hiring Incentives to Restore Employment (HIRE) Act of 2010, Pub. L. 111-147 in an effort by the U.S. government to curb offshore tax evasion. FATCA is wide reaching in scope with specific requirements directed at foreign financial institutions, certain nonfinancial foreign institutions, as well as individuals.
Impact to Foreign Financial Institutions and Certain Nonfinancial Foreign Institutions: Section 501(a) of the HIRE Act added chapter 4, comprised of sections 1471-1474, to Subtitle A of the IRC. Chapter 4 expands the information reporting requirements imposed on foreign financial institutions (FFIs) with respect to certain U.S. accounts and imposes withholding, documentation, and reporting requirements with respect to certain payments made to certain nonfinancial foreign entities (NFFEs).
With regards to FFIs, FATCA requires they report, by way of entering into an intergovernmental agreement with the IRS, certain information regarding financial accounts held by U.S. taxpayers or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest. If the FFI does not enter into an agreement with the IRS and does not comply with the rules of FATCA, U.S. withholding agents will be required to withhold a 30% tax on withholdable payments (withholdable payments are defined as 1) payments of interest, dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, and other fixed or determinable annual or periodical gains, profits, and income if the payment is from sources within the U.S.; 2) gross proceeds from the sale or disposition of U.S.-sourced investment property).
With regards to NFFEs, FATCA requires a withholding agent to withhold 30% of any withholdable payment to an NFFE if the payment is beneficially owned by the NFFE or another NFFE, unless certain reporting requirements are met.
Impact to Individuals: Section 6038D was enacted by section 511 of the HIRE Act and addresses reporting requirements of individuals holding interests in specified foreign financial assets (depository or custodial accounts at FFIs, stocks or securities issued by foreign persons, any other financial instrument or contract held for investment issued by a foreign counterparty, and an interest in a foreign entity). Beginning with calendar year 2011, an individual with an interest in a specified foreign financial asset during the taxable year must complete and attach Form 8938 (Statement of Specified Foreign Financial Assets) to their tax return to report specific information if the aggregate value of all assets exceeds the applicable threshold ($50,000 as of January 2013). Failure to do so can result in steep civil penalties of $10,000 with additional penalties not to exceed $50,000, after receiving notice from the IRS.
FATCA Guidance Tracker
- Notice 2013-10 – Information Reporting by Domestic Entities under Section 6038D with Respect to Specified Foreign Financial Assets was issued on January 23, 2013 in order to push back the date to taxable years beginning after December 31, 2012, that domestic entities will be required to report their interest in specified foreign financial assets on Form 8938 (Statement of Foreign Financial Assets) under section 6038D.
- Final Regulations [TD 9610] - Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities were issued on January 17, 2013 and take effect on January 28, 2013 regarding information reporting by FFIs with respect to U.S. accounts and withholding on certain payments to FFIs and other foreign entities. The 500+ pages of final regulations made substantial changes to the proposed regulations, including certain revised timelines, clarification of grandfathered obligations and certain payments made by NFFEs, as well as efforts to have the guidance sync up with intergovernmental agreements.
- Announcement 2012-42 – Timeline for Due Diligence and Other Requirements under FATCA was released on October 24, 2012. The announcement outlines delays in certain FATCA related deadlines in response to taxpayer concerns that the existing deadlines were looming too close for them to comply.
- Proposed Regulations [REG-121647-10] - Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities were issued on February 15, 2012 which addressed due diligence, withholding, reporting, and associated requirements related to FATCA.
- Notice 2011-53 – Chapter 4 Implementation Notice – This notice addresses the numerous comments concerning the implementation of FATCA on a timely basis.
- Notice 2011-34 – Supplemental Notice to Notice 2010-60 Providing Further Guidance and Requesting Comments on Certain Priority Issues under Chapter 4 of Subtitle A of the IRC was issued on April 8, 2011. This Notice provides updated guidance following comments on Notice 2010-60 on issues such as procedures to be followed by FFIs to identify U.S. accounts in relation to their pre-existing accounts, guidance regarding the definition of the term “passthru payment” as well as the obligation of FFIs to withhold on passthru payments.
- Notice 2010-60 – Notice and Request for Comments Regarding Implementation of Information Reporting and Withholding under Chapter 4 of the Code was published on August 27, 2010. The Notice provides preliminary guidance regarding the implementation of chapter 4, including the scope of obligations exempt from chapter 4 withholding, the definition of a foreign financial institution (FFI), the scope of information gathering and identification of persons by FFIs under sections 1471and 1472, and the information that FFIs must report to the IRS under an FFI Agreement with respect to their U.S. accounts.