Since July 1, 2014, the Foreign Account Tax Compliance Act (“FATCA”) has imposed a heavy compliance burden on Foreign Financial Institutions (“FFIs”). Many of these FFIs have struggled with developing a good understanding of their new FATCA requirements even to this day. In this brief essay, I want to provide a general overview of these FFI FATCA requirements so that readers can begin to develop an understanding of FATCA.
FFI FATCA Requirements: Background Information
FATCA was enacted into law in 2010. The most important idea behind the new law was to combat US tax noncompliance of US taxpayers with foreign financial assets.
There are several important parts of FATCA, but the most important one of them was forcing FFIs to identify US owners of foreign financial assets, collect certain information about them and share it with the IRS. Failure to do so meant facing a FATCA penalty in the form of a 30% withholding tax on the gross amount of all transactions with a noncompliant FFI. In essence, FATCA turned FFIs around the world into free IRS informants.
FFI FATCA Requirements: Three Categories
What precisely does FATCA require FFIs to do in order to be FATCA-compliant? If we look broadly at the FFI FATCA requirements, we can group all of these requirements into three broad categories. Each of these categories consists of a myriad of smaller but still fairly complex FATCA compliance requirements and requires a deep understanding of new FATCA terms.
The first and most important category of FATCA requirements is to collect the required due diligence information concerning all account holders, investors and payees. “Collecting” here means obtaining the required due diligence information and documentation. In other words, FATCA has to be part of an FFI’s “Know Your Client” (“KYC”) procedures.
Additionally, these new due diligence requirements apply not only to new customers, but also to pre-existing account holders. Pre-existing account holders are the account holders who already had accounts with an FFI as of the time FATCA was implemented (i.e. July 1, 2014) or sometimes a different date.
The second requirement is to report to the IRS three categories of persons: (a) all US account holders; (b) recalcitrant account holders; and © non-participating (i.e. FATCA-noncompliant) FFIs. This means that, under FATCA, FFIs must turn over to the IRS the identifying information concerning accounts held by US persons as well as point out the “bad apples” who refuse to comply with FATCA.
Recalcitrant account holders is a fairly complex FATCA term. In its most basic form, it refers to an account holder who does not supply the required FATCA information and who does not fall under any types of a waiver. In a future article, I will provide a more detailed description of this term, but, at this point, I would like to refer the readers to Treas Reg § 1.1471-5(g)(2).
Finally, the FFIs are charged with the requirement to coordinate FATCA withholding as necessary. In other words, the FFIs are required to impose FATCA noncompliance penalties on any FATCA non-compliant FFI, thereby turning FATCA in a worldwide self-enforcing system from which no FFI can escape.
FFI FATCA Requirements Are Interconnected
Needless to say that all three of these FFI FATCA requirements are deeply related to each other. For example, the due diligence requirement is essential to an FFI’s ability to properly comply with its FATCA reporting and withholding obligations. It is important to keep this connection between different FFI FATCA Requirements in mind while building an effective FATCA compliance system.
Contact Sherayzen Law Office to Find Out More About Your FFI FATCA Requirements
Sherayzen Law Office is a US international tax law firm that specializes in US international tax compliance, including FATCA compliance. We also help FFIs develop an effective FATCA compliance program as well as analyze existing FATCA compliance programs.