May 29, 2014
By: Diane Kennedy, CPA
After this exciting headline, your first question might be, “What is FATCA and why do I care?” Let’s start there.
FATCA (Foreign Account Tax Compliance Act) came about in 2010 as part of the HIRE Act. This added chapter 4 to Subtitle A of the Code. “Chapter 4” is the term to remember here.
There are also a couple of definitions to understand first:
Withholding Agent: A withholding agent or intermediary is an individual, corporation, partnership, trust, association or any other entity, including any foreign intermediary, foreign partnership, or US branch of certain foreign banks, and insurance companies
US Person: A US person includes a US citizen (even if there is another passport), US resident alien, a domestic partnership, a domestic corporation, a US estate, or a US trust.
FFI: An FFI (Foreign Financial Institute) is any foreign entity that accepts deposits in the ordinary course of banking, holds financial assets for others (and this is a substantial part of its business) or is engaged primarily in the business of investing, reinvesting or trading in securities, commodities or partnership interests.
Participating and Non-participating FFI: An FFI that enters into an FFI Agreement is participating (PFFI). One that does not is a non-participating FFI. (NPFFI)
FFI Agreement: An FFI Agreement is an agreement between the IRS and the PFFI where the PFFI agrees to obtain info on account holders that is necessary to determine if accounts are US accounts, comply with any required due diligence/verification, and annually report information on US accounts. They also agree to deduct and withhold 30% US tax on passthru payments to account holders that do not provide identification information or paid to a NPFFI.
The PFFI agrees to report the following information regarding US accounts:
(1) The name, address and US tax identification number of each account,
(2) In the case of any account holder that is a US entity with one or more US owners, the name, address, and TIN of each substantial US owner of such entity,
(3) The account number,
(4) The year-end account balance or value, and
(5) Gross receipts and gross withdrawals or payments from the account.
In essence, FACTA said that starting July 1, 2014, withholding agents have to withhold 30% tax on payments to foreign financial institutions (FFI) unless the FFI becomes a participating FFI. As a result, foreign tax planning for US taxpayers had to come out into the light. And, as is the case, with big and important change like this, there is a lot of misunderstanding and concern about the results.
On Friday, May 2, 2014, the US Treasury Department said that it won’t enforce many of the FATCA requirements for two years after it goes into effect, provided there is a ‘good faith effort’ to comply. The calendar years 2014 and 2015 will be considered transition years.
It is still intended that FATCA will go into operation on 7/1/14, but the IRS will refrain from “rigorously enforcing” many of the requirements. The IRS has specifically said that it “will take into account the extent to which a participating or deemed-compliant FFI or withholding agent has made good faith efforts to comply.
Some financial institutions have already put FATCA reporting systems into place. In fact, the IRS stated that nearly 60 jurisdictions have already signed up for these intergovernmental agreements.
The transition period is limited and should not be considered a full delay. The legal obligations in FTCA are still the law. It’s just that the enforcement will be not as strict.
It’s important to note that this two year extension is only for financial institutions. It does not mean that taxpayers get another two years before they get into compliance with reporting. Some of the things that the IRS will look for, regarding a good faith effort, are whether the FFI has made reasonable efforts to modify its account opening practices and procedures to document the status of payees.
In some ways, this partial delay is bad. It has added additional uncertainty to a process that already has global ramifications for American citizens.
Diane Kennedy, CPA helps business owners legally pay less tax. She’s the New York Times best-selling author of “Loopholes of the Rich”, “Real Estate Loopholes”, and 7 other best-selling financial and tax books. She’s also a business owner and real estate investor. Her motto is “It’s Your Money. Keep More Of It.”