FATCA: U.S. and Global Information Reporting and Withholding
The July 1, 2014 deadline for the implementation of certain requirements of foreign financial institutions and certain non-financial foreign entities under the FACTA is quickly approaching. The FATCA is a US law aimed at foreign financial institutions (FFIs) and other financial intermediaries to prevent tax evasion by US citizens and residents through use of offshore accounts. The FATCA provisions were included in the HIRE Act, which was signed into US law on March 18, 2010.
FATCA is intended to increase transparency for the Internal Revenue Service (IRS) with respect to US persons that may be investing and earning income through non-US institutions. While the primary goal of FATCA is to gain information about US persons, FATCA imposes tax withholding where the applicable documentation and reporting requirements are not met.
FATCA will have a far-reaching impact on US-based companies as well as foreign companies with US assets or clients. Under the new provisions, a foreign financial institutions (FFIs) may enter into an agreement with US tax authorities (a.k.a. IRS) requiring it, among other things, to report information on the FFI’s US accounts. A FFI that enters into such an agreement becomes a “participating FFI.”
- FATCA targets tax non-compliance by US taxpayers with foreign accounts
- FATCA focuses on reporting:
- By US taxpayers about certain foreign financial accounts and offshore assets.
- By foreign financial institutions about financial accounts held by US taxpayers or foreign entities in which US taxpayers hold a substantial ownership interest.The objective of FATCA is the reporting of foreign financial assets; withholding is the cost of not reporting.
- The objective of FATCA is the reporting of foreign financial assets; withholding is the cost of not reporting.
If a FFI does not enter into an agreement with the IRS, all relevant US-sourced payments, such as dividends and interest paid by US corporations, will be subject to a 30% withholding tax. The same 30% withholding tax will also apply to gross sale proceeds from the sale of relevant US property.
Facing potentially steep penalties for non-compliance, companies should evaluate their current processes to ensure compliance for 2014, as well as prepare for additional information reporting and withholding requirements likely arising in the future.
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