A Practical Response to FATCA

The Foreign Account Tax Compliance Act (FATCA) is an important development in US efforts to improve tax compliance involving foreign financial assets and offshore accounts. Under FATCA, US...

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The Foreign Account Tax Compliance Act (FATCA) is an important development in US efforts to improve tax compliance involving foreign financial assets and offshore accounts. Under FATCA, US taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS.

In addition, FATCA will require foreign financial institutions to report directly to the IRS information about financial accounts held by US taxpayers, or held by foreign entities in which US taxpayers hold a substantial ownership interest.

The Foreign Account Tax Compliance Act (FATCA) will impact US-based companies and foreign companies with US assets or clients. Under the new provisions, foreign financial institutions (FFIs) may enter into a special agreement with US tax authorities (IRS) which will require reporting of information on the FFIs US accounts. Once an FFI enters into such an agreement, it becomes a “participating FFI”.

The diverse jurisdictions across Asia-Pacific increase implementation challenges. Some countries have data confidentiality and privacy laws that restrict financial institutions from releasing customers’ information to third parties unless proper consent has been obtained from customers.

While the proposed regulations represent more transparency for customers and banks, it is what has been covered, such as pass-thru payments, that leave many financial institutions frustrated that they still do not have clarity on what they have to do to comply and what the eventual cost of responding to FATCA will be.

A foreign financial institution could face significant consequences if it fails to enter into an agreement with the IRS, and this would include aligning all the key stakeholders, such as operations, technology, risk, legal, and tax. The institution would be subjected to a 30% withholding tax on any “withholdable payment” made to its proprietary account for failing to comply with FATCA.