The Foreign Account Tax Compliance Act (FATCA) has survived legal challenges and disclosure is now the law of the land, with tight deadlines for compliance. Foreign financial institutions (FFIs) must register with the IRS and comply with investor due diligence and verification procedures to identify and report on US account holders.
Banks in a Model 1 Intergovernmental Agreement (IGA)—currently 16 countries (see the Treasury Department FATCA website for more information)—must register by December 31, 2014. Banks in countries that enter into Model 2 IGAs (again, see the Treasury Department FATCA website) must register by June 30, 2014.
Banks that don’t register will be subject to 30 percent withholding on certain US-source payments.
In-house vs. out-of-house
Because FATCA compliance has several components, banks can choose how much, if any, of the process they wish to outsource. With 500 pages of regulations, many banks are splitting up the tasks, keeping some functions—such as those related to information technology—in-house, while outsourcing more administrative tasks—such as the creation of a FATCA compliance manual.
Key points to remember
Buried within those regulations are several key items, including the following:
- FFIs must appoint a responsible officer who will ensure that the FFI is registered with the IRS.
- FFIs in jurisdictions that have not entered into a Model 1 IGA with the US will require that the responsible officer certify the FFI’s FATCA status.
- IT functions will have to be rewritten to allow banks to easily identify ownership of all accounts, particularly American account holders of foreign accounts.
The focus of FATCA on FFIs doesn’t mean that domestic banks are off the hook. Many other countries have passed or are considering passage of regulations similar to FATCA. Additionally, there are reciprocal and nonreciprocal Model 1 IGAs. In a reciprocal IGA (via reference to a treaty or language in the IGA itself), domestic banks will have to report to the IRS information on accounts owned by foreign citizens; and the IRS will then turn this information over to the foreign government. For example, Canada and the US are in negotiations to execute a Model 1 IGA. If such an agreement is signed and it is a reciprocal IGA, US banks will be required to report information on Canadian account owners to the IRS, and the IRS will turn it over to the Canada Revenue Agency.
Ultimately, US banks will have to report, in one form or another, on the account information held by foreign nationals from the countries that have IGAs with the US.
Additionally, domestic banks with offshore investment activity may be at risk under FATCA. Domestic banks should provide their taxpayer identification information to any FFIs with which the domestic bank has any investments (or any FFI with which investments might flow through). The reason: banks must ensure that any US-based FDAP (fixed, determinable, annuity, or periodic) income generated by the investment that flows through the FFI is not subject to 30 percent withholding under FATCA.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.
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