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Foreign Account Tax Compliance Act FATCA: Regulations And Compliance

The Foreign Account Tax Compliance Act (FATCA) has far reaching effects on foreign financial institutions (FFIs as defined by the IRS) that have accounts from U.S. individuals or entities. Generally, if a financial institution located outside the United States holds or manages an account held by a U.S. taxable entity or individual (a U.S. person) it is considered an FFI. This can include insurance policies and investments including cryptocurrencies. Such accounts are potentially taxable assets and income under U.S. jurisdiction, and subject to reporting to the Internal Revenue Service (IRS) by the FFI. The passing of this legislation significantly affects the basis on which financial institutions deal with U.S. clients and investors. Though many FFIs may not be directly under U.S. jurisdiction in any way, it is also not a market they want to exclude themselves from due to non-compliance. 

U.S. entities sending payments to non-U.S. persons, may also be affected, as U.S. entities are required to maintain documentation on how those persons are classified under FATCA regulations.

The rationale behind FATCA

FATCA represents the U.S. Treasury Department’s efforts to prevent U.S. taxpayers who hold financial assets in non-U.S. financial institutions and other offshore vehicles from avoiding U.S. tax obligations, and was enacted by the Hiring Incentives to Restore Employment (HIRE) Act in 2010.

Perceived tax abuse by U.S. persons using offshore accounts and the lost revenues are at the forefront of the law’s purpose, however the effects are being felt by financial institutions around the world. Many companies are finding that they are required under the law to report information on account holders that may be considered U.S. persons for tax reasons, as well as many individuals are also finding out that they may be considered U.S. persons, despite never exercising their status as such in any way.

FFI agreement with IRS or local government

A problematic aspect of FATCA is that it appears to regulate entities that the U.S. has no jurisdiction over. Foreign financial institutions are sometimes required to enter into an agreement with the IRS, or their own country's government agency, to disclose information about U.S. citizens who invest outside the U.S. The FFI agreement requires FFIs to identify, keep records, and report accounts connected to the U.S., as well as disclose their verification and review procedures.

The U.S. has signed intergovernmental agreements with over 100 foreign countries including France, the UK, Italy, Spain and Germany to ensure reporting by FFIs located in these jurisdictions. Hiding assets is accordingly very difficult in the wake of FATCA due to FFIs reporting requirements through their home countries agreements with the U.S., and the 30 percent withholding on U.S. sourced income applied to non-compliant FFIs, which though such withholding can still be mitigated or reduced through applicable tax treaties, it is a problem most FFIs would prefer to avoid.

Compliance with FATCA can be confusing and difficult

In order to comply with the rules, FFIs are required to enter into an FFI agreement with the U.S. Treasury or comply with intergovernmental agreements between their local jurisdictions. U.S. withholding agents must document all of their relationships with foreign entities in order to assist with the enforcement of the rules. Without such an agreement, account holders may be charged an automatic 30 percent withholding tax. Failure to impose the requisite withholding under FATCA requirements could result in significant financial exposure.

A business’s FATCA Status is also a requirement to be accurately reported to the IRS, including on Form W-8BEN-E, commonly used to avoid 30 percent withholdings from foreign entities on U.S. income.

Thresholds on earning and assets triggering a requirement to report

FATCA requires FFIs to provide the IRS with information on certain U.S. persons (as defined under the Internal Revenue Code) with interests in accounts outside of the U.S., with an aggregate annual value of USD 50,000, but also puts an onus on individuals to report their foreign assets as well. The Foreign Bank Account Reporting Act (FBAR) also applies to individuals with regards to reporting foreign assets.

Taxpayers who live outside the U.S. benefit from a higher threshold. If the value of their specified assets does not exceed USD 200,000 at the end of the tax year no declaration is necessary, unless these assets have exceeded USD 300,000 at any time during that tax year. A U.S. citizen who holds specified foreign assets where the value exceeds the reporting threshold must report them using IRS Form 8938. Specified assets include not only accounts with an FFI, but also foreign assets held outside a financial institution, for example shares issued by a foreign company.

Severe penalties for non-compliance with FATCA

Businesses are often penalized for failing to comply with FATCA, and unfortunately reasonable or good faith lack of understanding of the law in these areas is not a defense to violating them. FFIs that do not comply with FATCA will potentially face a 30 percent withholding of their income from U.S. sources. For FFIs that do regular business with U.S. compliance is highly desired.

FATCA, however, is not designed to specifically target FFIs, but rather the individual account holders (persons and entities). Intentional failure to disclose foreign held assets can be as high as the greater of 50 percent of the value of the assets, or USD 100,000. This can mean that if an account is worth less than USD 100,000, the final penalty can be more than the total value, especially since penalties are assessed on a yearly basis for every year of failing to report.

Even unintentional non-compliance can carry a significant penalty of USD 10,000 per year for every year of non-disclosure. This does not include additional IRS penalties for failure to file required forms such as Form 8938 each time it needed to be filed, with a maximum penalty of USD 160,000, and a maximum penalty for unintentional nondisclosure of USD 50,000 per tax return. Failure to file returns, disclose assets, or report your status, if determined to be a form of fraud also carries criminal implications that may result in investigations or charges.

Your attorney for FATCA compliance and reporting

If you think you or your business may be subject to FATCA requirements, or are possibly already in violation we can assist with reviewing your status and identifying what obligations and options are available. Your attorneys for U.S. tax matters are

Get in touch! The easiest way to reach us is by email (info@winheller.com) or by phone (+49 (0)69 76 75 77 80). Tell us more about your U.S. business and we will offer a service package tailored to your particular needs.

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