Overview
The Foreign Account Tax Compliance Act (FATCA) was enacted by the United States of America (U.S.) on March 18, 2010 as part of the U.S. Hiring Incentives to Restore Employment (HIRE) Act. FATCA is geared towards combating tax evasion by U.S. taxpayers holding assets in non-U.S. financial accounts/ institutions. FATCA requires Foreign Financial Institutions (FFIs) to report to the U.S. Internal Revenue Service (IRS) information on assets held by U.S. tax payers, or by foreign entities in which U.S. taxpayers hold substantial (greater than 10%) ownership interest or assets of more than US$50,000 held by US taxpayers.
Where an FFI chooses not to comply with FATCA, the IRS will impose 30% withholding on payments to FFIs and on behalf of its customers and possibly suffer loss of correspondent banking relationships.
Foreign Financial Institution (FFI) Key Terms
FFI – Foreign Financial Institution
Any foreign entity that:
- Accepts deposits in the ordinary course of banking or a similar business such as banks and credit unions.
- Holds financial assets for the account of others as a substantial portion of its business such as brokerages or custodians.
- Is engaged, or holding itself out as being engaged, primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest. This includes a futures or forward contract or option in such securities, partnership interests, or commodities such as mutual funds, private equities and hedge funds.
Participating FFI
FFI that enters into an agreement with the IRS to undertake certain due diligence, withholding and reporting requirements for US account holders.
Deemed Compliant FFI
An FFI that is exempt from withholding without entering into an IRS agreement, including:
- Registered deemed-compliant – An FFI that registers with the IRS to declare its status. This includes certain local banks, non-reporting members of participating FFI groups, qualified collective investment vehicles, restricted funds, and FFIs that comply with FATCA requirements under an agreement between the US and a foreign government.
- Certified deemed-compliant – An FFI that is not required to register with the IRS and certifies its status by providing a withholding agent with a valid Form W-8. This includes non-registered local banks, retirement plans, non-profit organizations, FFIs with only low-value accounts, and certain owner-documented FFIs.
Excepted FFI
Entities which are excluded from the FFI definition and not subject to withholding including:
- Holding companies engaged in non-FI business
- Start-up companies for non-financial business
- Liquidating or reorganizing non-financial entities
- Group hedge/financial company which is non-financial and restricted to affiliates
- Organized in US Territory
Non-Participating FFI
An FFI that does not enter into an agreement with the IRS and is not deemed compliant or excepted.
FFIs Eligibility for Reporting and Registration
Non-U.S. financial institutions that accept deposits hold financial assets for others invest in securities or trade in securities for others. The following entities are required to report under FATCA:
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custodial institutions
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depository institutions
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investment entities
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specified insurance companies
These entities include Banks, Funds, Insurance Companies, Trusts, Private Equity Companies, and Special Purpose Entities.
FFIs Registration
Foreign Financial Institutions are required to register on the IRS website before reporting commences. The U.S. IRS FATCA registration page can be found here. FFIs that have registered with the U.S. IRS will be issued a GIIN and will appear on a monthly published IRS FFI list.
FFIs Responsibilities
The Competent Authority to be designated;
FFIs are required to register with the IRS and will be assigned a Global Intermediary Identification Number (GIIN);
FFIs are to report information to the Competent Authority, who transmits such information to the IRS;
Information on assets of US$50,000.00 or more held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold substantial ownership interest (>10%), are to be identified and reported to the IRS by the FFIs;
Pre-existing Entity accounts that have account balances that exceed US$250,000.00 are required to be identified, and reviewed to ascertain if the account holder is a U.S. person;
The Competent Authority is required to enforce compliance if notified by the U.S. Competent Authority that an FFI has been significantly non-compliant, or else the FFI will be treated as a non-participating FFI (NPFFI) and has 18 months to resolve the issue.
Role of the FFI Responsible Officer
- Appointed to ensure the participating foreign financial institution (PFFI) meets the requirements of the agreement;
- Will be identified as the FATCA Responsible Officer in the FATCA registration system;
- May select points of contact to help complete all aspects of registration except signing;
- Officer in charge shall establish sufficient policies and procedures for the PFFI to meet the requirements of the agreement;
- Reviews the adequacy of the program;
- Reports material errors;
- Prepares certification within six months of every certification period.