November 2012 - What is FATCA?
Google the word FATCA and you get 1,180,000 results. Every week, somewhere in the world a congress is held dealing with the why, what, how and when of FATCA, compliance issues under FATCA, software specifically developed for FATCA etc.
More and more regulations are proposed by the Internal Revenue Service (‘IRS”) and over 50 countries are looking into concluding FATCA agreements with the U.S.A.
Most of the material available is very technical and geared towards the financial institutions affected by FATCA.
Foreign Banks such as those located in Switzerland and Israel freeze accounts of their U.S. clients who cannot or do not want to sign on a W-9 or FATCA statements or declarations.
The IRS extended the Offshore Voluntary Disclosure Program for 2012 so those persons negatively affected by FATCA can come forward and report their previously unreported income and financial accounts.
But what does it mean for the average U.S. and non U.S. taxpayer? In this article, we will try to give you a short overview what FATCA means for you as the individual.
Summary of Key FATCA Provisions
The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 is an important development in U.S. efforts to combat tax evasion by U.S. persons holding investments in offshore accounts.
Under FATCA, certain U.S. persons holding financial assets outside the United States must report those assets to the IRS. In addition, FATCA will require foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. persons, or by foreign entities in which U.S. persons hold a substantial ownership interest.
Reporting by U.S. Persons Holding Foreign Financial Assets
FATCA requires U.S. persons holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938) that must be attached to the taxpayer’s annual tax return. Failure to report foreign financial assets on Form 8938 can result in a penalty of at least $10,000.
Reporting by Foreign Financial Institutions
FATCA will also require foreign financial institutions (“FFIs”) such as foreign banks, broker/dealers, insurance companies and private equity funds to report directly to the IRS certain information about financial accounts held by U.S. persons, or by foreign entities in which that U.S. person hold a substantial ownership interest. To properly comply with these new reporting requirements, an FFI will have to enter into a special agreement with the IRS. Under this agreement the FFI will be obligated to:
(1) undertake certain identification and due diligence procedures with respect to its accountholders; it is for this reason that banks have been asking their clients to provide them with Form W-9.
(2) report annually to the IRS certain information on its accountholders who are U.S. persons such as:
• The name, address, and Taxpayer Identification Number (TIN) of each account holder;
• The account number;
• The account balance or value at year end;
• Dividends, interest and other income paid or credited to the account.
Alternatively, an FFI may make an election to provide full IRS Form 1099 reporting on each account holder that is a U.S person as if the holder of the account were a natural person and citizen of the United States; and
(3) withhold and pay over to the IRS 30-percent of any payments of U.S. source income made to for example a FFI that does not have an agreement with the IRS and to individual accountholders failing to provide sufficient information to determine whether or not they are a U.S. person.
U.S. source income is income that arises from sources within the U.S.A. The source of income is determined based on the type of income. The source of compensation income is where the services giving rise to the income were performed, i.e., if work is done in the U.S.A, the work is U.S. sourced income. The source of certain other income, such as dividends and interest, is based on residence of the payer. The source of income from property is based on where the property is used.
A joint account which has one U.S. and one non-U.S. owner is treated as a U.S. account and the entire account is subject to reporting as a U.S. person. The mere transfer of money from someone in the U.S.A. to someone in a foreign country will not in itself trigger FATCA withholding. However, money transferred into, and income earned in, a U.S. account may be subject to the FATCA reporting requirements.
FATCA Timeline
Notice 2011-53 and Announcement 2012-42 provide a phased-in timeline of key FATCA implementation dates for FFIs. Some of the important dates are:
Earliest Effective Date of an FFI Agreement between the IRS and a FFI
• January 1, 2014
Implementation of New Account Reporting Procedures
• January 1, 2014
Preexisting Accounts – Documentation of Accounts
• December 31, 2014 with respect to high value individual accounts (over $1,000,000)
• December 31, 2015 with respect to non-high value individual accounts
Withholding Requirements
• January 1, 2014 with respect to income withholding on new accounts;
• January 1, 2015 with respect to high value individual accounts;
• January 1, 2016 with respect to non-high value individual accounts; and
• January 1, 2017 with respect to gross proceeds and foreign passthru payments withholding
Pursuant to requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing, or recommending to another person any tax-related matter. This article discusses general legal issues, but it does not constitute legal advice in any respect. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Hacohen Wolf expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.