Hold Financial Assets Abroad? New Regulations May Affect You
In 2010, Congress enacted the Foreign Account Tax Compliance Act (FATCA) to help the US government identify US taxpayers who hold financial assets abroad in order to facilitate tax compliance. FATCA does so by imposing a withholding tax on certain US payments to foreign financial institutions and requiring additional reporting by those institutions. On January 17, 2013, the US Treasury issued final regulations under FATCA, and the this blog summarizes some of the FACTA’s main components.
Who needs to comply?
Foreign financial institutions (FFIs) with US account holders and/or investors are required to comply with the new withholding and reporting requirements. The term “foreign financial institution” in FATCA includes, for example, investment funds (i.e. private equity and venture capital funds), insurance companies, or other institutions that accept deposits or hold financial assets for the account of U.S persons.
How does one comply?
Those who are required to comply with FATCA must register with the IRS online, and the registration portal is scheduled to open sometime in the middle of August (the link should be available on the IRS website). A draft of the institutional registration form is available for reference here. Through the registration portal, foreign financial institutions subject to FATCA must enter into an FFI Agreement with the IRS to facilitate compliance.
While the exact agreement has not yet been released, a participating FFI will likely have to agree to:
- Obtain and report information on each US person and his or her financial accounts.
- Withhold 30% tax on certain payments that are made to institutions or persons that do not comply with FATCA.
- Appoint a Responsible Officer that will oversee compliance with the FFI agreement.
The US Treasury is also currently working with foreign governments to allow disclosure of U.S investor information to the IRS in cases where foreign privacy law would prohibit it. Moreover, depending on the country they are in, foreign financial institutions may be able to just report information to their national tax authorities who will then report it to the IRS.
Though some dates are set, they may change and institutions that may be affected can subscribe to IRS FATCA-related updates here.
Consequences for not complying
There are significant consequences to not complying with FATCA. Certain payments made to a nonparticipating FFI may be subject to a 30% withholding tax. A “withholdable payment” generally includes any payment of fixed, determinable, annual or periodic income from US sources, including interest, dividends, rents and other types of payments. This tax will only be applied to payments made to FFIs after June 30, 2014.
In addition, if a participating FFI fails to abide by the terms of the FFI agreement, the IRS can request review procedures, external auditing, or further information from the FFI. Under circumstances where the FFI defaults and does not remedy the default, the IRS can terminate that FFI’s status as a participating FFI.
Campbell Law Group can help financial institutions determine what, if any, new obligations they have under FATCA and also, if necessary, how to register and comply with the FATCA requirements.
Disclaimer: The above FATCA information is not meant to constitute legal advice and for details about how your specific institution can comply with FATCA, please consult with an attorney.
Shyaam Subramanian wrote this post with some input from Bruce Campbell. Shyaam is working with Campbell Law Group as a law clerk during the summer between his second year and third year of the law school at Boalt Hall, UC Berkeley’s School of Law.