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IRS: No Delays - FATCA is Coming

By Alex August, CPA, MBA

According to the Internal Revenue Service (IRS), there will be no more delaying it: the FATCA withholding rules will go into effect July 1, 2014.

The Foreign Account Tax Compliance Act, or FATCA, was enacted in 2010 by Congress to target tax non-compliance by U.S. taxpayers with foreign accounts. Put another way: the Act strives to reduce offshore tax evasion by U.S. taxpayers with foreign financial accounts.

FATCA goes about this by requiring foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers or, in the case of non-financial foreign entities (NFFEs), report U.S. taxpayers holding a substantial ownership interest in certain foreign entities.

Reuters reporter Patrick Temple-West effectively summarizes the "stick" of the Act's "carrot and stick" approach when he writes, "Foreign businesses that do not comply with the law can be effectively frozen out of U.S. capital markets because of a 30-percent withholding tax on U.S. source income."

The carrot in this scenario is the government's assertion that "the objective of FATCA is the reporting of foreign financial assets" and that withholding is merely the cost of not reporting. FATCA, in other words, is about halting tax evasion, not applying onerous costs to the foreign interests of U.S. businesses or individuals.

So, what qualifies as an FFI? An FFI is a foreign entity that:

  • Accepts deposits in the ordinary course of a banking or similar business, or
  • Holds financial assets for other as a substantial part of it business, or
  • Is engaged primarily in the business of investing, reinvesting or trading in securities (this aspect is intended to be applied broadly to include banks, securities firms, money service businesses, hedge funds, private equity funds or any other type of financial firm that holds, invests or trades assets on behalf of itself or another person

The definition of an FFI is generally considered to include foreign trusts.

FFIs must register with the IRS, agreeing to identify any accounts held by specified U.S. persons or U.S.-owned foreign entities through established due diligence procedures. Such registered FFIs will obtain a Global Intermediary Identification Number (GIIN) for FATCA reporting purposes and will be exempt from withholding. This registration is currently open until April 25, 2014.

In many cases, the United States has entered into inter-governmental agreements (IGAs), directly with foreign countries to ensure FATCA compliance, which also includes a bilateral information exchange. The bilateral exchange will also require U.S. financial institutions to share foreign account holder information with contracting foreign countries.

After April 25, the next important date is July 1. That's when withholding on U.S. source fixed, determinable, annual or periodic (FDAP) income begins; withholding on gross proceeds from the sale of property begins after January 1, 2017. U.S. withholding agents must withhold 30 percent on such payments to foreign entities that do not document their FATCA status to the U.S. withholding agent. The U.S. withholding agent will be held primarily responsible for amounts not properly withheld.

FATCA-related action items:

  • Determining if foreign entities with which you have a relationship qualify as FFIs and if registration with the IRS is necessary.
  • When applicable, U.S. withholding agents will need foreign entities to provide forms W-8BEN E to determine the FATCA status of foreign payees for the purpose of withholdable payments.
  • As has been the case for the past two years, applicable U.S. account holders will be required to complete Form 8938 – Statement of Specified Foreign Assets to report foreign financial asset holdings.

The most vital action item? Speaking with a qualified advisor. Contact me today to learn more about how Rehmann can help you address FATCA and other urgent tax issues.

About the author
Alex August, CPA, MBA is a senior tax manager at Rehmann. He services several large closely held and multinational companies, including all aspects of income taxation for the company, related entities and family members. Contact Alex today at 248.458.7931 or alex.august@rehmann.com.

Published in Tax

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