FATCA: Foreign Account Tax Compliance Act
FATCA, or the Foreign Account Tax Compliance Act, was enacted in 2010 as part of the HIRE Act. FATCA requires that US taxpayers holding financial assets outside the US are required to report those assets to the Internal Revenue Service. FATCA also requires foreign financial institutions to report directly to the IRS information about accounts held by US taxpayers.
Additionally under the provisions of FATCA, payments of US-source income, including interest, dividends, and other investment income made to non-US individuals are subject to US withholding tax of 30%, unless the withholding agent can establish that the owner of the amount is eligible for exemption from withholding or is subject to tax at a reduced rate under an income tax treaty.
Gains from the sale of property by a nonresident alien or foreign corporation are exempt from US tax, unless they are effectively connected with the conduct of a US trade or business. Gains are subject to US taxation only if the individual meets the requirements of the substantial presence test, which generally means the individual is present in the US for 183 days or more during the year.
The IRS Tax Code sections enacted by the new law are 1471, 1472, 1473, and 1474, and in order to avoid being withheld upon under FATCA, a foreign financial institution [FFI] will have to enter into an agreement with the IRS to:
1. Identify U.S. accounts,
2. Report certain information to the IRS regarding U.S. accounts, and
3. Withhold a 30-percent tax on certain payments to non-participating FFIs and account holders who are unwilling to provide the required information.
FFIs that do not enter into an agreement with the IRS will be subject to withholding on certain types of payments, including U.S. source interest and dividends, gross proceeds from the disposition of U.S. securities, and passthru payments. The phase-in guidance for FATCA under Notice 2011-53 are as follows:
1. An FFI must enter an agreement with the IRS by June 30, 2013, to ensure that it will be identified as a participating FFI in sufficient time to allow withholding agents to refrain from withholding beginning on January 1, 2014.
2. Withholding on U.S. source dividends and interest paid to non-participating FFIs will begin on Jan. 1, 2014, and withholding on all withholdable payments (including on gross proceeds) will be fully phased in on Jan. 1, 2015.
3. Reporting requirements for “high-risk accounts”, i.e., those with a balance equal to or greater than $500,000 will begin in 2013.
The form for reporting foreign financial assets will be Form 8938. To view a draft of the form, you can go here.
