The Foreign Account Tax Compliance Act (FATCA) is an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts.
Under FATCA, U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS.
In addition, FATCA will require foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
Other countries are not reporting information because of claims that it is an invasion of their privacy laws. Intergovernmental agreements are being established as a work-around to these concerns/laws. STA has put together a sub-committee on how the industry is going to comply with the new rules and regulations.
FATCA is a significant piece of legislation that will impact many U.S. and non-U.S. entities, both financial and non-financial. Under FATCA, foreign financial institutions (FFIs) are expected to sign an agreement with the U.S. Internal Revenue Service (IRS) identifying any U.S. person accounts and to report certain information on an annual basis. In addition, both U.S. financial institutions and FFIs will be required to report details to the IRS regarding substantial U.S. owners of non-financial foreign entities (NFFEs) unless an intergovernmental agreement (IGA) is signed.
Penalties for non-compliance are potentially severe. A non-compliant FFI or NFFE may be required to apply a 30 per cent withholding tax. The institution may also be held liable for any tax that it fails to withhold, plus interest and penalties.
Compliance requirements will begin at the start of 2013 and will continue to be phased in through to January 2017. While some components of the legislation have yet to be confirmed, there is sufficient guidance available to help organizations prepare for full compliance with FATCA
For specific filing information for U.S. taxpayers and Foreign Financial Institutions, go to: http://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-(FATCA)