What is The Foreign Account Tax Compliance Act (FATCA)?

FATCA, which is US legislation, is the latest in a number of measures being introduced around the world taking a more draconian view on matters of tax compliance and regulation.

FATCA is extremely wide reaching and is designed to ensure that the US Internal Revenue Service (IRS) is able to catch all overseas income and gains that should be liable to US taxation.

What does FATCA do?

At this stage, the US authorities have only issued guidelines but it is expected that these will remain largely unchanged.

Under the guidelines, all payments of US source income and capital to Foreign Financial Institutions (FFIs) and Non Financial Foreign Entities (NFFE) will be subject to a withholding tax (WHT) penalty of 30 per cent unless the institution or entity concerned has entered into an agreement with the IRS.

The agreement will require the qualifying entity to provide certain information on US account holders and their transactions as well as committing to applying the withholding tax to any transfers on to non-compliant FFIs.

Who qualifies as an FFI or NFFE?

The envisaged terms of FATCA are designed to cover all institutions that accept deposits or hold assets for the account of, or trade on behalf of, US investors using US source income.

In light of this, FATCA covers all banks, funds, trusts and other investment vehicles and so will have an effect on all levels of the financial services industry.

When will this take affect?

The timeline for implementation is designed so that all FFIs who wish to avoid the WHT deductions have to submit their agreement applications to the IRS by 30 June 2013 as the tax deductions are due to commence from 1 January 2014.

What should individual service providers do?

The impact on institutions administering or managing vehicles or accounts that fall under the terms of FATCA will be the level and detail of analysis and due diligence needed to identify US tax payers whatever route they may use to introduce capital into that vehicle.

This will require enhanced KYC and client review procedures to ensure that the demands for information by the IRS can be met to their satisfaction.


Despite the fact that the deadline for implementation is still some time off, it is imperative that all entities which may be affected by FATCA begin to consider whether they fall under the definition of an FFI or NFFE, whether they have exposure to US sourced income and, if necessary, review their procedures to ensure that they are able to meet the demands of compliance with the reporting requirements of the IRS.

Moore Stephens Jersey is already addressing this and can provide assistance to anyone who feels that they may be affected by FATCA.

Previously published March 2012

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.