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The Phase-in Is Underway for the Reporting of Information. Under the Foreign Account Tax Compliance Act (FATCA)

Thursday, March 01, 2012 - Jack Brister, TEP & Raul Incera, CPA

Jack Brister

Raul Incera

FATCA is here to stay!

That is our response when foreign financial institutions and U.S. taxpayers ask about the Foreign Account Tax Compliance Act (FATCA) and their obligations to comply.

The Internal Revenue Service (IRS) and the U.S. Treasury Department (Treasury) took an important step on February 8, 2012 when they issued proposed regulations that implement a phase-in of FATCA's reporting and withholding requirements for Foreign Financial Institutions (FFIs).

The primary and most far-reaching requirement imposes a 30 percent income tax withholding on FFIs that do not sign and comply with a reporting agreement with the IRS by June 30, 2013. Any U.S.-source income received by the FFI will be subject to the withholding. FFIs that do not sign such an agreement will be treated as a nonparticipating foreign financial institution (NFFI).

It is anticipated that the IRS and Treasury will issue final regulations in the summer of 2012.

The proposed regulations have several important provisions that make FATCA compliance less onerous and time-consuming than had originally been expected.

For banks and other entities that meet the FATCA definition of an FFI (discussed below), compliance requirements will begin in 2014.

In many instances, FFIs are able to use rules of their home country regulators in identifying accounts that are subject to FATCA reporting, particularly those related to know your customer (KYC) and anti-money laundering (AML). FATCA has become a major concern for non-U.S. based financial institutions, many of which have offices and clients in the United States, as well as for U.S. withholding agents and U.S. individuals with foreign financial holdings.

FATCA is part of the Hiring Incentives to Restore Employment Act (HIRE), passed by Congress and signed by President Obama in March 2010. It is an element in the Obama administration's effort to increase the reporting of, and collection of income taxes on, financial assets held outside the U.S. by U.S. persons.

Foreign Financial Institutions (FFIs)

FATCA defines an FFI as a foreign entity which in its ordinary course of business accepts deposits or holds financial assets for others, or whose primary business activity is the investment in or trading of financial assets or commodities. With limited exceptions, foreign banks, broker dealers, foreign hedge funds, private equity funds, private investment funds, pension funds, insurance companies, foreign trust companies and foreign trusts are included in the FFI definition.

FATCA essentially mandates that foreign financial institutions that receive U.S.-source income either on their own account or on behalf of their clients become the equivalent of a Qualified Intermediary (QI) and look beyond the direct beneficial owner of an account or investment to any indirect, ultimate owners.

The agreement with the IRS will require that the following steps be undertaken by the FFI:

  • Implement certain identification and due diligence procedures with respect to its accountholders
  • Annually report to the IRS the account information of any U.S. accountholders, including foreign entities, with substantial U.S. ownership
  • Impose a 30 percent withholding tax in the cases of non-compliance
  • Comply with information requests from the IRS
  • Close accounts held by U.S. accountholders who refuse to waive secrecy rights

It is imperative that entities that meet the definition of an FFI accelerate their internal compliance procedures. The following action steps should be taken:

  • Develop systems that facilitate electronic information reporting
  • Obtain U.S. employer identification numbers for accountholders
  • Provide annual compliance reports signed and authorized by the chief compliance officers under penalties of perjury

U.S. Taxpayers

U.S. taxpayers must evaluate whether they have a Form 8938 (Statement of Specified Foreign Financial Assets) filing requirement. This form must be submitted together with the 2011 (and subsequent years') income tax returns. Certain U.S. nonresidents may also have the filing requirement, including those who elect to file a joint U.S. income tax return and certain individuals living in U.S. territories.

Specified foreign financial assets include the following:

  • Depository or custodial accounts at foreign financial institutions
  • To the extent not held in an account at a financial institution,-stocks or securities issued by foreign persons, any other financial instrument or contract held for investment that is issued by, or has a counterparty that is, not a U.S. person, and an interest in a foreign entity

The filing of Form 8938 is required when the total value of specified foreign assets exceeds the following thresholds:

  • Single person or married person living in the U.S. who does not file a joint return-- More than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year
  • Married couple living in the U.S. and filing a joint return -- More than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year
  • Single person or married person living abroad who does not file a joint return --More than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year
  • Married couple residing abroad and filing a joint return -- More than $400,000 on the last day of the tax year or more than $600,000 at any time during the year

Penalties may be imposed due to the failure to file a required Form 8938.
It is important to note that the Form 8938 filing requirement does not replace, nor affect, a taxpayer's obligation to file Form TD F 90-22.1 (Report on Foreign Bank and Financial Accounts). Such form must be filed by any U.S. person who has a financial interest in, or signatory or other authority over, any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year.

With FATCA deadlines approaching, our International Tax specialists and Financial Institutions specialists at MBAF can provide FFIs and taxpayers that are subject to FATCA with additional information and advise them in their preparations for reporting agreements and other compliance.

To contact Jack Brister, email jbrister@mbaf-ere.com. To contact Raul Incera, email rincera@mbafcpa.com. Or call 1-800-239-1474.

The purpose of this newsletter is to provide general information on tax, audit and other issues related to the financial services industry. The information contained herein may not apply to all institutions or organizations and their specific circumstances. Financial services organizations are encouraged to consult directly with an accounting expert before making tax and accounting decisions.