FATCA - New Rules in the Offshore Assets Game

May 7, 2013 03:47 PM

FATCA, FFI, NFFE, IGA, GIIN, KYC….how many acronyms does it take for the IRS to get the message across that they are serious about finding your offshore assets?  If the acronyms don’t get you, the 30% withholding tax imposed for failing to comply with the FATCA rules may.

The nervously anticipated final regulations under the Foreign Account Tax Compliance Act, FATCA, are now out.  Issued in January and running in excess of 500 pages, the FATCA rules can be confusing and difficult to follow.  The final regulations painstakingly attempt to identify all of the players, the players’ roles, and the cost for not playing by the IRS rules in the reporting of off-shore assets game.   If you can make it through the classic Abbot and Costello skit “Who’s on First,” you might be able to make it all the way through the FATCA rules. 

What is FATCA?

FATCA is the IRS’s aggressive global initiative to capture information on U.S. taxpayers’ “offshore” foreign assets.  Failure or refusal to comply with the FATCA reporting requirements under sections 1471 through 1474 may result in a 30% withholding tax on U.S.-sourced FDAP payments to non-compliant foreign financial institutions (FFIs), non-certifying non-financial foreign entities (NFFEs), and recalcitrant FFI account holders. 

Who’s on First—Who are the FATCA Players?

Where does all this start?  It depends on your position on the playing field. 

The players include U.S. taxpayers with off-shore assets and with greater than 10% ownership in a foreign entity (referred to as substantial foreign entity ownership), the foreign financial institutions (FFIs) where the U.S. taxpayer’s assets may or may not be on account, the non-financial foreign entities (NFFEs) that may or may not have substantial U.S. ownership, and last but certainly not least, the enforcers—the withholding agents on both the U.S. and foreign sides.

First at bat under the new FATCA rules are the heavy hitters — the U.S. taxpayers off-shoring their assets.  U.S. taxpayers with specified foreign assets that do not provide the information required under FATCA to the respective FFI are identified as “recalcitrant”.  Recalcitrant account holders are subject to the 30% withholding tax on specified payments from the FFIs.

Next at bat are the FFIs that harbor the assets.  FFIs that agree to follow FATCA reporting, register with the IRS, and obtain a Global Intermediary Identification Number  (GIIN), will be identified as a participating FFI and thus safe from the 30% withholding tax.  Deemed-compliant FFIs, considered low risk entities under the FATCA rules, may or may not need to register with the IRS depending on their classification under the three “deemed-compliant” categories.  Deemed compliant FFIs are also safe from the 30% withholding tax.  Non-participating FFIs are those that choose not to follow the FATCA requirements for identifying their U.S. account holders and are thereby subject to the 30% withholding tax on certain U.S.-source payments.

The least threatening player in the FATCA game is the NFFE.  An NFFE is any foreign entity that is not a financial institution.  Many types of NFFEs are exempt from the FATCA withholding requirements—active NFFEs, publicly traded corporations, expanded affiliated group (EAG) members of a publicly traded corporation, certain U.S. possessions-organized entities, and other excepted nonfinancial entities. 

Umpiring is done by the Withholding Agents.  Once the bases are loaded with U.S. account holders, FFIs and NFFEs, it is up to the withholding agent to confirm that the players are safe at the plate without any withholding or to call them out via the 30% withholding tax for failure to comply. 

What’s on Second—What’s required for FATCA?

If you are a U.S. taxpayer with offshore assets, be prepared to supply and verify all of your U.S. taxpayer information to your foreign financial institution. 

If you are an FFI and are opting to participate in the FATCA requirements, you will need to register with the IRS and obtain a  GIIN.  IRS registration begins July 15, 2013.  As a participating FFI, certain reporting of U.S. owned accounts and potential withholding obligations on recalcitrant account holders will be required. 

NFFEs are not required to register with the IRS, but are required to provide ownership information to withholding agents when requested.  Substantial U.S. owners (greater than 10%) must be identified, or a certification that there are no substantial U.S. owners must be provided.  Failure to provide this information will subject the NFFE to the 30% FATCA withholding tax. 

A myriad of Forms are being created (Forms 8957 and 8966) and updated (Forms W-8), and filing requirements for other Forms are expanded (Forms 1042, 1042-S, and 8938) for reporting FATCA information to the IRS. 

The U.S. government is also creating and entering into intergovernmental agreements (IGAs) with partner countries in an effort to facilitate cooperation and side-step local privacy laws.   IGAs are effectively information exchange agreements between the IRS and the tax authorities of foreign countries.  Two IGA models currently exist:

  • Model 1, where the FFI must report information on U.S.-owned accounts to their local tax authority who in turn reports that information to the IRS.  In reciprocal Model 1 IGAs, the U.S. reports the same type of information back to the foreign tax authority.
  • Model 2 requires FFIs to report U.S.-owned account information directly to the IRS.

The IRS is actively pursuing IGAs with foreign tax authorities.  As of the date of this publication, seven countries (including the U.K., Mexico, and Switzerland) have entered into an IGA with the U.S., and another 40 IGAs are in the works.

I Don’t Know is on Third – Know Your Customer!

Withholding Agents play the most important role in the FATCA game and are tasked with knowing the FATCA players and their positions on the field.  How do you know if you are a Withholding Agent?  Here’s a starting point—any U.S. or non-U.S. person (including an FFI) that has control, receipt, custody, disposal or payment of any withholdable payment has withholding agent responsibilities.  This includes individuals, corporations, partnerships, trusts, associations, and any other entity.  A pretty all-inclusive list!

Withholding agents have the burden of identifying whether the FFIs are participating, deemed compliant, or non-compliant, and if the NFFEs that they are associated with have registered their ownership and identified their substantial U.S. owners.  If the FFI is non-compliant or if the NFFE does not disclose its substantial U.S. shareholders, then the withholding agent has the FATCA imposed responsibility to withhold 30% of the withholdable payment. 

Withholdable payments encompass two main categories—U.S.-sourced FDAP income (fixed, determinable, annual, or periodic, such as interest, dividends, royalties, etc) and gross proceeds from the sale or other disposition of property that can produce U.S.-source interest or dividend income.

FFIs can also be withholding agents on pass-thru payments to recalcitrant account holders, or account holders that do not provide the required information for FATCA compliance. 

Key effective dates

July 15, 2013—FFIs begin registration with the IRS and obtain GIIN

January 1, 2014—First of the phased-in withholding requirements take effect

March 2015—Reporting on U.S. account holders via Form 8966 FATCA Report.  Form 8966 has not been released yet, but is expected in late 2013 or early 2014

What you need to do to get ready

Determine your position on the playing field.  Are you an offshore investor, a foreign financial institution, a non-financial foreign entity, a U.S. payer with Withholding Agent responsibilities, or any of those players potentially subject to the 30% withholding tax on U.S.-source FDAP income?  Then determine whether you want to play by the FATCA rules—if you are not exempt from the FATCA rules, will you cooperate with the reporting requirements or will you be non-compliant and suffer the 30% withholding tax? 
The key point from the IRS is to KYC—know your customer.  Now is also the time to know your FATCA obligations, know your filing and reporting requirements, and know that the IRS is intent on finding those off-shore assets and penalizing those not willing to play the game by their rules. 

True Partners Consulting can help you get ready for the game.  Contact us and let us help you figure out the rules of the game, the equipment needed, and when you will be at bat.

Aileen Arsenault

Sonali S. Fournier

Robert M. Gordon

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