Heard of FATCA but not sure what it’s all about? The Foreign Account Tax Compliance Act (FATCA) basically means that US citizens will no longer be able to evade tax by hiding assets offshore. Elias Stephan, Managing Partner of Law House explains how this might impact this region.
Under FATCA, certain US taxpayers holding financial assets outside the US must report those assets to the IRS. In addition, FATCA will require foreign financial institutions (FFIs) to report directly to the Inland Revenue Service (IRS) certain information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest.
In fact, as of 1 January 2014, any global non-US financial institution that receives any fixed or determinable annual or periodical US source interest, gains, profits, and income has to reveal it.
“The aim of FATCA is to redress historical deficiencies in reporting to the IRS that lead to non compliance with US tax regulations,” says Elias Stephan, Managing Partner of Law House.
Its proposed regulations state that FFIs that have US account holders, US proprietary instruments and /or US financial dealings must report these to the IRS or be subject to a ‘withholding tax’.
FFIs must sign an agreement with the IRS by 30 June 2013 to ensure treatment as PFFIs (participating foreign financial institutions) beginning on 1 January 2014 and avoid a 30 per cent withholding tax on all income and capital payments received by the FFIs from US sources.
FFIs will have to obtain information on each account holder of each account maintained by the FFI in order to determine if the account is a US account. They will also have to annually report information on US accounts and comply with any IRS information request.
What this means, says Stephan, is that owners of foreign held assets must report on these along with filing US tax returns, if these assets are worth more than $50,000. A higher reporting threshold applies to overseas residents. “Account holders would be subject to a 40 per cent penalty on understatements of income, in an undisclosed foreign financial asset. FFIs are also bound to withhold and pay over to the IRS 30 per cent of any payments of US source income, as well as gross proceeds from the sale of securities that generate US source income, made to (a) non-participating FFIs, (b) individual account holders failing to provide sufficient information to determine whether or not they are a US person, or (c) foreign entity account holders failing to provide sufficient information about the identity of its substantial US owners.”
FATCA in MENA
FATCA’s definition is broad and includes any non-US entity. FATCA’s reach in MENA then will impact a wide range of financial institutions such as commercial banks, saving banks, credit unions, clearing organizations, trust companies, mutual funds, private equity funds, hedge funds and insurance companies which issue investment like insurance contracts or annuity contracts. The mechanism dictates that an entity that invests in the US will also have to comply with FATCA, irrespective of whether it has a branch, office or other presence. Many financial institutions have not reacted positively, with significant lobbying of key concerns
IT IS ESSENTIAL THAT FINANCIAL INSTITUTIONS ACROSS THE REGION FULLY UNDERSTAND THE IMPACT OF FATCA IN TIME FOR THE GO LIVE DATE
surrounding the cost of compliance implementation requiring unprecedented up front and ongoing investment into resources, training and IT process. Presently, analyses surround detailed reviews at business level to ascertain US customers and counterparties, types of payments received from the US and current procedural systems for identifying and documenting US persons. FATCA has made a number of concessions by delaying the date of implementation of its proposed regulations. In fact, reporting requirements are simplified for the calendar year 2013, withholding begins on 1 January 2014 and full implementation of FATCA starts on 31 March 2017.
Prepare for launch
While there has been less FATCA publicity in MENA, some financial institutions are already taking steps to study the proposed regulations’ impact and are putting mechanisms in place to deal with consequences. As MENA is home for many US educated and green card holders with US passports that may come under scrutiny by US residence and indicia rules – there will be substantial work by MENA FFIs to ensure readiness for FATCA requirements. Although primary legislation has been passed by the IRS last year, it is anticipated that a number of draft regulations will be released with more extensive guidelines as to how the rules will operate.
“It is essential that financial institutions across the region fully understand the impact of FATCA in time for the go live date. Non-compliance with FATCA can result in a 30 per cent withholding tax, while compliant institutions are also likely to refuse to deal with a non-FATCA registered institution,” said Stephan.
FATCA’s domain will grow as it evolves similar laws to apply to non-financial foreign entities (NFFE) with similar penalties, unless these organizations provide certain information regarding its US owners.