FATCA

The Foreign Account Tax Compliance Act (“FATCA”) is part of the US Hiring Incentives to Restore Employment Act which was enacted in 2010. The main objective of FATCA is to combat tax evasion by US Persons using non-US accounts and structures. It works by requiring non-US Financial Institutions (“FIs”) to report directly (or indirectly via their own tax authorities) to the US Internal Revenue Service (“IRS”) any (non-US) assets held by their US Account Holders, with significant sanctions (see below) for non-compliance.

Who does it apply to?

Everyone - FATCA works on the premise that every person could potentially be a US Person and therefore unless positive steps are taken to prove that someone is not a US Person, they will be treated as a US Person for FATCA purposes.

What are the key requirements/ dates/ penalties?

All FIs must register (or be registered) on the FATCA Portal and obtain a GIIN as evidence of compliance (or, where permitted by FATCA, ensure they are covered by the GIIN of another FI). FIs must identify the Account Holders of the Financial Accounts they maintain and report information about Account Holders or Controlling Persons who are US Persons annually. There are complex definitions and specified due diligence procedures for identifying Account Holders depending on the type of FI concerned. Non-Financial Foreign Entities (“NFFEs”) with over 50% of their income being passive (as defined for FATCA purposes) must be reported upon by any FIs with which they interact (rather than reporting direct).

FATCA may apply directly via the US Regulations (in which case FIs report directly to the IRS) or it may apply via an Intergovernmental Agreement between the USA and another jurisdiction (in which FIs report to their own tax authority respectively), depending on the jurisdiction in which an FI is located. Sanctions for non-compliance include (but are not limited to):

• a non-refundable FATCA withholding tax which certain paying agents are obligated to deduct at the rate of 30% on certain US income and gains arising to non-FATCA compliant accounts;
• the threat of exclusion from the US currency and securities markets;
• FIs that resist compliance (so-called recalcitrant accounts) must be closed and details reported to the IRS; and
• reputational damage associated with FATCA non-compliance.