Top 12 Tips About FATCA

For Americans (US Persons) living abroad or investing offshore, the Foreign Accounts Tax Compliance Act (FATCA) requires Foreign Financial Institutions (FFIs) like local banks, stockbrokers, pension and hedge funds, insurance companies, and trusts to report directly to the IRS. When reporting to the IRS, FFIs have to provide the details of all their clients who are US persons, including the specifics of their personal accounts. The reporting requirements began on January 1, 2014. Many foreign governments have signed agreements with the US to exchange detailed information.

Below are a dozen of the top questions asked.

1.What is an FFI?

A Foreign Financial Institution (FFI) is broadly defined in the FATCA regulations. In short, an FFI is any non-US entity that includes but is not limited to:

  • Depository institutions (for example, banks)
  • Custodial institutions (for example, mutual funds)
  • Investment entities (for example, hedge funds or private equity funds)
  • Certain types of insurance companies that have cash value products or annuities

2.What is an NFFE?

An entity that is not classified under the definitions of an FFI is considered an NFFE (Non-Financial Foreign Entity).

3.What is FDAP Income?

FDAP is an abbreviation for Fixed, Determinable, Annual or Periodic income. FDAP income applies to foreign persons earning income from US sources. Such persons will be subject to 30% withholding tax or a lower rate if there is a tax treaty between the United States and the country of residency.

4.What is a Recalcitrant Account Holder?

A recalcitrant account holder is any account holder that:

  • Fails to comply with reasonable requests for information necessary to determine if the account is a United States account;
  • Fails to provide the name, address, and Tax Identification Number (TIN) of each “specified United States person” and each substantial United States owner of a US-owned foreign entity; or
  • Fails to provide a waiver of any foreign law that would prevent a foreign financial institution from reporting information required under FATCA.

5.What is considered indicia of US status?

IRS Notice 2011-34 lists six indicia of US status:

  • US citizenship or lawful permanent resident (green card) status
  • A US birthplace
  • A US residence address or a US correspondence address (including a US PO box)
  • Standing instructions to transfer funds to an account maintained in the United States, or directions regularly received from a US address
  • An “in care of” address or a “hold mail” address that is the sole address with respect to the client
  • A power of attorney or signatory authority granted to a person with a US address

Having any of these will flag the reporting agent to further investigate the account holder to verify if the individual is a US person.

6.What is a Deemed Compliant FFI?

Some FFIs will not be required to enter into an FFI agreement with the IRS, in order to be exempt from FATCA withholding. These FFIs are referred to as deemed-compliant FFIs, which are required to have met their withholding requirements:

  • Apply for deemed-compliant status with the IRS;
  • Obtain an EIN from the IRS; and
  • Certify to the IRS every 3 years that it meets the requirements for deemed-compliant status.

Note: Deemed-compliant is reserved for only certain entities that the IRS has deemed low risk of tax evasion, such as local banks, local FFI members of participating FFI groups and certain investment vehicles.

7.What does an entity do if it is being requested to provide a W-8BEN-E form from a US withholding agent?

Classification of your entity status under the FATCA withholding rules will need to be performed in order to properly fill out this form.

8.What is an Intergovernmental Agreement (IGA)?

An IGA is an agreement between the United States and another jurisdiction. It sets out general definitions, the obligations of the United States and the FATCA Partner jurisdiction to obtain and exchange information, the application of FATCA to financial institutions in the FATCA Partner jurisdiction, and the procedures for compliance. Annex I of the IGA describes the due diligence requirements for identifying and reporting on specific types of accounts under FATCA. Annex II will set forth a list of financial institutions and financial products that will be treated as exempt or deemed compliant for the purposes of FATCA. Annex II will be tailored on a country-specific basis and therefore the Model IGA includes only the framework for Annex II.

9.How do I know which FATCA withholding rules the entity falls under?

Look into your local IGA agreement for the definition of FFI/NFFE, and for further clarification see the FATCA Final regulations for guidance on classifications of entities. FATCA compliance team can help. Visit the IRS website for a current list of countries with an IGA.

10. If my company is organized in the UK under the Model 1 agreement do I still need to register?

In some cases, you will, depending on if it is a reporting or non-reporting UK financial institution.

11.How can an entity prove that it has acted in ‘good faith’ to comply with FATCA law?

Sign an engagement letter to prove that you are looking into getting third-party assistance from a US Tax specialist. Perform the due diligence that is required by the stated IRS deadlines.

12.What is the difference between an IGA Model 1 and a Model 2 Agreement?

Under the Model 1, FFIs in partner jurisdictions will be able to report information on US account holders directly to their national tax authorities (i.e., HMRC), who in turn will report the information to the IRS.

In Model 2, financial institutions will report information directly to the IRS rather than their local jurisdictions.

Additionally, the Common Reporting Standard will allow governments to exchange this information.

For more information, please contact us.

Article written by James Debate