By introducing FATCA, the US hopes to gather a sizeable amount of tax owed by US persons. Gordon Andrews tells us more.
In March 2010 the Hiring Incentives to Restore Employment (HIRE) Act, of which the Foreign Account Tax Compliance Act (FATCA) forms a significant part, was signed into US law. The US tax system is based on voluntary reporting of worldwide assets and income to the US Internal Revenue Service (IRS) by US taxpayers. The aim of FATCA is to combat tax evasion by any US persons who hold undeclared assets and accounts with overseas financial institutions.
Contrary to popular belief, FATCA does not impose additional taxes on US persons. It does however require foreign financial institutions (FFIs) to report information to the US Internal Revenue Service (IRS). The information to be reported relates to financial accounts which are generally classed as either bank accounts, life assurance policies or other investments held by US taxpayers, or by foreign entities in which US persons hold substantial ownership.
In order to achieve compliance with FATCA, the US negotiated and entered into Intergovernmental Agreements (IGAs) initially with around 80 countries. These IGAs will allow financial institutions in those countries to comply with FATCA whilst avoiding certain legal obstacles in the home country, such as data protection requirements which would, in most cases, prevent compliance with the proposed regulations. In broad terms, the key requirements financial institutions have to undertake to be compliant with FATCA are as follows.
Existing customer review
Financial institutions were obligated to undertake a review of existing customer records, as at 30 June 2014, in order to determine which had US connected persons associated with them. . As well as customers who are individuals, FATCA also included measures which required financial institutions to review customers which are deemed legal entities. The purpose of these measures is to identify any US persons behind those legal entities who exercise control over them.
Customer identification and validation
If customers have identifiers indicating they are ‘US persons’, financial institutions were required to contact those customers to validate whether they are classed as ’US persons’ or not. A customer will be treated as a US person if they could not or did not produce certain information which enabled the financial institution to treat them as a non-US person.
New business procedures
In order for financial institutions to not report customer information to the IRS, financial institutions will, from 1 July 2014 financial institutions must obtain certification from all applicants confirming whether they are, or not, deemed to be an US person. The financial institution are required to review this certification in light of information obtained in the customer’s application as well as any additional information obtained for the purposes of anti-money laundering.
If at any time a financial institution notes a change in the customer’s circumstances which may indicate a US person – such as a change of address or where there is an assignment which leads it to believe that the initial certification is inaccurate or has changed – then the financial institution must revalidate the certification with the customer.
In the absence of self-certification from the customer the financial institution must treat the customer as reportable.
Reporting of information on US persons
Where customers are validated as US persons or have not produced the required information to treat them as non-US, the financial institution are obligated to report certain information regarding that individual. Dependent on the nature of any agreed IGA in the institution’s home country; this information will be reported directly to the IRS or through its home state tax authority, which will pass it on to the IRS.
The first reporting deadline for financial institutions was 31 May 2015 for financial accounts that started from 1 July 2014 up to and including 31 December 2014.
Is the end in sight?
It is clear that FATCA is a far reaching piece of legislation and does have a major effect on financial institutions worldwide. When the US originally announced FATCA, many believed it would not work as it was extremely ambitious. At present there still remains uncertainty in some countries around how FATCA will affect local financial institutions. This is due to the lack of clarity around final IGAs and currently having no detail of local regulation. However, since it became clear that FATCA would work, other countries are now looking to introduce and enter into similar types of agreements based around the FATCA model. The first is the agreement between the UK and the three Crown Dependencies and its overseas territories which comes into effect from 1 July 2014 – the same time as the FATCA. Over 90- countries implemented the Common Reporting Standards from the 1 January 2016 which duplicates the FATCA model.