Foreign Account Tax Compliance Act (FATCA)

Key features
In March 2010 the U.S. enacted the Hiring Incentive for Restoring Employment Act (the ‘Hire’ Act). This act incorporated the anti–avoidance revenue provisions contained in the Foreign Account Tax Compliance Act (‘FATCA’). The goal of FATCA is reduce tax leakage to ensure the Inland Revenue Service (‘IRS’) can identify and collect the appropriate tax from U.S. persons holding financial assets outside the U.S. In practice FATCA involves a far reaching disclosure and reporting regime, which will impact the payments made and received by U.S. payers and foreign recipients respectively.

FATCA applies to any entity with U.S. clients or assets which provide U.S. source income. The provisions will impose a 30% withholding tax on certain U.S. source payments, made to foreign financial institutions (‘FFIs’) and non-financial foreign entities (‘NFFEs’) that fail to identify certain U.S. investors even if such U.S. persons directly or indirectly hold only non-U.S. assets. A FFI is an entity which;

1. accepts deposits in the ordinary course of business or similar business; or
2. holds financial assets for the account of others as a substantial portion of its business; or
3. is engaged in the business of investing, re-investing or trading in securities, partnership interests, commodities or any interest in such securities, partnership interest or commodities.

FFIs include institutions such as:

1. banks;
2. building societies;
3. brokers;
4. asset managers;
5. insurance companies;
6. custodians;
7. clearing houses;
8. withholding agents; and
9. funds including hedge funds, funds of funds, private equity funds and ETFs.

Most corporations which are in the business of investing will be FFIs. However indications are that insurers offering low risk products including locally approved retirement plans and products in which non-U.S. investors cannot invest may be out of scope whilst insurers offering life-based products and investment management activities will be captured by the regime. There is also a de-minimis exemption where U.S. persons who maintain no more than US$50,000 in accounts with the same institution will not be affected by the new disclosure requirements.

Although primarily drafted with financial institution in mind, it is important to understand that FATCA may also capture non financial trading entities. If an entity does not fall into the definition of FFI above but holds U.S. assets or has U.S. investors it will be treated as a non-financial foreign entity (‘NFFE’). NFFEs will also be required to be FATCA compliant and document and report their U.S. assets and/or U.S. investors. Failure to do so will lead to a 30% withholding which will be applied upstream by the US payer/bank/withholding agent on U.S. source income and sale proceeds. t is currently unclear whether the US$50,000 threshold also applies in the case of NFFEs.

FATCA requires withholding agents to apply a 30% withholding tax on ‘withholdable payments’ to non-compliant FFIs and NFFEs. Withholdable payments include:

1. interest, dividends and other periodic payments from U.S. assets;
2. gross proceeds on the disposition of property of the type that can produce interest or dividends from a U.S. source; and 
3. deposit interest paid by U.S. and foreign branches of U.S. bank, even though portions of this interest may not be treated as U.S. source under current U.S. tax law.

Key dates

1. final regulations, FFI agreements and reporting forms are due to be released over the summer of 2012;
2. the effective date and withholding will start on 1 January 2014 for U.S. dividends and interest;
3. this will be extended to all withholdable payments including gross proceeds and pass through payments on 1 January 2015;
4. an FFI must put in place an agreement with the IRS by 30 June 2013 if it wants to guarantee withholding will not be incorrectly applied at the start of 2014. To ensure an agreement is in place by this date, applications should be submitted by the end of Q1 2013;
5. FFIs should be carrying out full due diligence on existing and new clients in 2013 and will have to comply with their FFI agreement; and
6. information on U.S. accounts identified before 30 June 2014 will need to be reported to the IRS by 30 September 2014. Any discrepancies identified by the IRS that are not resolved will be treated as recalcitrant.

What steps should you take?
It is clear FATCA will place a significant compliance and reporting burden on any organisation caught by the definition of FFI or NFFE. Firms to which it applies must identify, document and report on U.S. persons as required under FATCA or face a punitive withholding tax cost, which will be irrecoverable. There are numerous strategic and operational decisions which will need to be considered and planned. Some of these will be substantive process re-engineering exercises which will take some time to implement. Businesses will need to have all their analysis, systems and controls in place before applying for an agreement by Q1 2013, in order to ensure they get an agreement before the deadline.

How can Grant Thornton help?
Grant Thornton is committed to delivering dynamic solutions to complex problems. We work closely with our international colleagues to co-ordinate international engagements and provide a seamless service in the disciplines and jurisdictions that our clients need. Market participants affected by FATCA have much to do to ensure FATCA preparedness and compliance. Our Financial Services, Tax, Business Risk and Business Consulting teams are well placed to advise you on the steps you must take to prepare as the new legislation unfolds. In collaboration with our international colleagues, we will work closely with you through all or any of the implementation stages of FATCA, to deliver impact assessments, design and planning, implementation and compliance verification solutions.