FATCA, What are the Foreign Account Tax Compliance Requirements? An Update
The Foreign Account Tax Compliance Act ("FATCA") was passed in 2010 in reaction to the UBS banking scandal and public sentiment that there were wealthy Americans failing to disclose foreign assets and income to the IRS. FATCA was designed with the primary intention of exposing undisclosed overseas accounts of Americans. FATCA imposed a two-pronged approach to attempt to uncover foreign assets: (1) Foreign Asset Reporting by U.S. persons, and (2) Foreign Institution Reporting of U.S. accounts.
Two additional global regimes have been passed and implemented.
- The United Kingdom adopted a UK FATCA measure whereby UK accounts in Crown Dependencies (CDs) and Overseas Territories (OT) are reported to local competent authority.
- A broad reporting regime titled the Common Reporting Standard (“CRS”), is a global initiative led by the OECD to increase tax transparency, starts in 2017 and draws extensively on the intergovernmental approach to implement FATCA. CRS is a global network of agreements between 90+ jurisdictions requiring foreign institutions in participating jurisdictions to report on an annual basis to local governments.
The following provides an overview of US FATCA, UK FATCA and CRS FATCA.
Foreign Asset Reporting by U.S. Persons
FATCA requires a U.S. person to file Form 8938, Statement of Specified Foreign Financial Assets, if such U.S. person directly holds foreign financial assets that exceed certain threshold values. The Form 8938 is attached to a taxpayer's tax return and is due with the return by the due date including any applicable extensions. For tax years ending after December 19, 2011, persons required to file include U.S. citizens, resident aliens, and certain nonresident aliens including those that claim a treaty position to be treated as a nonresident alien, those who make an election to be treated as a U.S. resident and residents of certain U.S. possessions. Effective tax years ending after December 31, 2015, the Form 8938 filing requirement is extended to include specified domestic entities (i.e., a domestic corporation, partnership, etc.) if:
- The entity is closely held (80% ownership interest) by a U.S. citizen or resident alien;
- 50% or more of the entity’s gross income for the tax year is considered passive income (e.g., interest, dividends, rents, royalties), or at least 50% of the assets held by the entity for the tax year are considered assets that produce or are held for the production of passive income; and
- The total value of the entity’s specified foreign financial assets exceeds $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
A domestic trust may also be considered a specified domestic entity for Form 8938 purposes if one or more of the trust’s beneficiaries is a U.S. citizen or resident and the above mentioned asset value thresholds are satisfied.
As with many of the foreign information reporting forms, significant penalties may be imposed for failure to file.
Similar to the thresholds for entities, the thresholds for individuals reporting foreign financial assets is more than $50,000 at the end of the year or $75,000 at any time during the year for a single taxpayer. The thresholds are doubled for individual taxpayers that are married and higher thresholds exist for taxpayers that are living abroad.
Foreign financial assets that are required to be reported include financial accounts maintained overseas, interests in foreign mutual funds, stock issued by foreign corporations, capital or profits interests in foreign partnerships, financial instruments with foreign issuers or counter-parties, interests in foreign trusts or estates, and any form of indebtedness issued by foreign persons. The IRS has a chart on their website that can be a helpful quick tool for determining whether assets need to be reported.
Note that the Form 8938 filing requirements and the FBAR (Form 114) reporting requirements are duplicative.
Foreign Institution Reporting of U.S. Accounts
FATCA also requires foreign institutions and other foreign entities that meet a widespread definition of a foreign financial institution (“FFI”) to participate in a program where they agree to report U.S. account holders/investors (“owners”) or otherwise face 30% withholding tax on certain types of passive income such as interest, dividends, capital gains, etc. FATCA requires FFIs to register with the IRS, agree to due diligence requirements, information reporting regarding their U.S. owners and implement withholding obligations. The 30% withholding is also imposed on foreign entities that are not considered FFIs if they do not report substantial U.S. owners. The following provides a brief overview of the how FATCA rules operate.
FATCA imposes a 30% withholding tax on U.S. source passive income paid to foreign entities that are non-compliant. The passive income includes what is currently referred to as fixed determinable annual and periodical ("FDAP") income. On January 1, 2017, the 30% withholding tax will be expanded to include certain capital gain income which is currently not taxable under U.S. tax law. FATCA breaks out foreign entities into two different broad categories: (1) foreign financial institutions (“FFIs”), and (2) non-financial foreign entities ("NFFEs").
To reduce or eliminate the 30% FATCA withholding:
- FFIs not covered by a Model I Intergovernmental Agreement ("IGA") must enter into an FFI agreement with the IRS to report U.S. owner information and withhold on non-compliant owners.
- FFIs covered by a Model I IGA must register with the IRS to obtain a GIIN and will report U.S. owner information directly to their home country.
- NFFEs must certify that they do not have any 10% U.S. owners or submit information related to U.S. owners to the withholding agent or submit proof of "excepted NFFE" status.
FFIs encompass a broad range of entities including foreign banks, certain insurance companies, investment entities, and collective investment vehicles. An investment entity includes an entity that engages in investing, administering, or managing funds, money, or financial assets on behalf of other persons. An investment entity also includes a financial entity that is professionally managed. These include entities managed by other investment entities and the regulations specify that private equity, hedge, and mutual funds are included as FFIs. Holding companies and treasury centers may also be considered FFIs if another member of the affiliated group is an FFI or if the company is used by a collective vehicle. Note that payments made to FFIs may be exempt from FATCA withholding if allocable to exempt beneficial owners including foreign governments, international organizations, and certain foreign retirement plans.
An NFFE is any foreign entity which is not classified as an FFI. As previously mentioned, certain NFFEs are exempt from the general due diligence and identification requirements including publicly traded corporations and their subsidiaries, foreign governments and their subdivisions, international organizations, foreign central banks, and active NFFEs. An active NFFE is an NFFE with less than 50% of its income and assets comprising of passive income and assets.
IGAs entered into between the U.S. and partner countries are designed to facilitate the exchange of information and are specifically geared toward FATCA reporting. When FATCA was first announced there was concern that companies may be violating local laws by disclosing confidential information to the IRS. An IGA clarifies that companies are allowed to disclose the information to the IRS under local law and eases these concerns. Many countries have already entered into IGAs with the U.S. and other countries have agreements in substance which are not yet finalized IGAs. The Treasury maintains a list of countries with IGAs currently in effect.
UK FATCA and CRS Reporting of Non-U.S. Accounts
The FATCA regime mentioned above is governed solely by the United States. Increased FATCA reporting is required under two additional global regimes similar to U.S. FATCA:
- UK FATCA
Starting 2016, the United Kingdom requires financial institutions located in Crown Dependencies (CDs) and Overseas Territories (OTs) to report UK accounts to local competent authority. Specifically, financial institutions located in Jersey, Guernsey, Isle of Man and Gibraltar are required to be reported to UK tax authorities.
The thresholds for reporting are similar to U.S. FATCA. Unlike U.S. FATCA, there is no withholding mechanism on non-compliant payees. Another primary difference is that the U.S. tax forms (i.e., Forms W-8BEN-E, W-8 and W-9) are not acceptable to capture all UK FATCA information. The UK FATCA rules require collection of separate individual or entity self-certification forms. Note that UK FATCA will eventually transition into CRS FATCA, which is described more fully below.
- CRS FATCA (“CRS”)
CRS is the standard for automatic exchange of financial account information (“AEOI”) developed by the OECD, and is a global initiative to increase tax transparency. CRS, a global network of agreements between 90+ jurisdictions, is a broad FATCA reporting regime that draws on the intergovernmental approach to implement FATCA. Under CRS, starting as early as 2017, FIs and Passive NFEs in “early adopter” jurisdictions will be required to report individual and entity accounts held by tax residents of CRS participating jurisdictions. Since CRS FATCA includes 90+ countries the scope of reporting under CRS FATCA may be significantly greater than U.S. FATCA reporting. CRS FATCA will eventually require FATCA reporting in the 90+ jurisdictions that have adopted CRS to report account holders of residents of the member 90+ countries.
Similar to U.S. FATCA, CRS requires FIs and Passive NFEs that are resident in participating jurisdictions to implement similar due diligence procedures to document reportable accounts, and implement a reporting process on an annual basis to local governments. Similar to UK FATCA, the U.S. tax forms (i.e., Forms W-8BEN-E, W-8 and W-9) are not acceptable to capture all CRS FATCA information. The CRS FATCA rules require collection of separate individual or entity self-certification forms.
To learn more about FATCA, please contact Curt Giles at email@example.com