United States: Foreign Account Tax Compliance Act ("FATCA")

Last Updated: August 11 2015
Article by OIL Offshore Incorporations

FATCA refers to provisions contained in the Hiring Incentives to Restore Employment Act (the 'HIRE' Act) signed into law on 18 March 2010 in the United States. The main purpose of FATCA is to identify and gather information on US persons who may be evading tax through the use of non-US bank accounts and investment vehicles.

FATCA requires financial institutions outside the US (FFIs) such as banks, custodians, trustees, trusts and investment funds to pass information about their US customers to the Internal Revenue Service (IRS). As of 1 July 2014, failure to meet these new reporting obligations will result in a 30% withholding tax on the financial institution concerned.

FATCA is being implemented through a combination of US Regulations and Intergovernmental Agreements (IGAs) between the US and other jurisdictions. Over 100 jurisdictions have now entered into, or substantially reached agreement, with the US to enter into an IGA. This list includes popular offshore jurisdictions like the BVI, Cayman Islands, Seychelles, and also Hong Kong, China and Singapore, and most of the major economies of the world.

FFIs: FATCA is very complex and a detailed analysis is required in each case to determine if a company is in fact a FFI. However, generally, the following four categories of entities will be FFIs and be directly affected by FATCA's registration and reporting requirements.

  • Investment Entities: Broadly, an entity that conducts (or is managed by an entity that conducts) trading or portfolio and investment management activities as a business on behalf of a customer or otherwise invests, administers or manages funds or money on behalf of other persons.
  • Custodial Institutions: An entity that holds, as a substantial portion of its business (broadly, more than 20% of gross revenues), financial assets for the account of others.
  • Depository Institutions: An entity that accepts deposits in the ordinary course of a banking or similar business.
  • Specified Insurance Company: An insurance company (or its holding company) that issues, or is liable under, certain cash value or annuity contracts.

For example, a company may be treated as an investment entity if (1) the entity's gross income is 50% or more attributable to investing in financial assets; and (2) such entity is professionally managed by another FFI. "Financial assets" may include security, partnership interest, commodity, notional principal contract, cash value insurance contract or annuity contract or any interest in any of these assets, etc. As each jurisdiction may set different rules in defining the scope of the category, there is no simple and clear cut answer to whether an entity is an investment entity or not.

Subject to the IGA a country has signed, trust, in general, is likely to be regarded as a FFI in many jurisdictions.

Trustee and fiduciary service providers are subject to FATCA compliance requirements, and the interest of beneficiaries and beneficial owners are generally treated as accounts for FATCA reporting purposes.

Reportable Account: A reportable account is defined as an account held by one or more specified U.S. persons or by a non-U.S. person, trust or other entity with one or more controlling persons that is a specified U.S. person.

Specified U.S. persons are defined as U.S. citizens or resident individuals, and also partnerships and corporations that are organised under the laws of the U.S., excluding public companies, tax exempt organisations, registered investment companies and certain government organisations.

IGA: The first agreement, known as the Model 1 IGA, would require FFIs to report all FATCA related information to its own governmental agencies, which would then report the FATCA related information to the IRS. Countries such as Bahamas, Belgium, BVI, Cayman Islands, Malta, and Singapore are Model 1 IGA jurisdictions.

The second version of the IGA, the Model 2 IGA, would require FFIs to report information directly to the IRS. Hong Kong and Switzerland are Model 2 IGA jurisdictions.

GIIN: FFIs need to obtain a GIIN (Global Intermediary Identification Number). FFIs need to register with the IRS in order to obtain a GIIN under either type of IGA.

Registration Information: All qualified FFIs are required to register with the IRS in order to obtain the GIIN. The key information required for registration as FFIs are:

  • Name of company
  • Country of incorporation of the company
  • Mailing address of the company
  • The information on the Responsibility Officer and Contact Person of the company

Reporting Requirements: If an FFI has a reportable account, i.e. with Specified US Person as account holder, information is required to be reported with respect to 2014, including:

  • Account holder's name
  • Account holder's U.S. taxpayer identification number (TIN)
  • Account holder's address
  • Account number
  • Account balance or value

For accounts held by "Non-Consenting US Account" holders: aggregate number and balance or value.

Withholding Tax: In general, a withholding agent is required to withhold 30% on a withholdable payment made to a FFI or to a non-financial foreign entity, unless such entity meets certain requirements. In addition, an FFI must withhold 30% on any passthru payment it makes to a recalcitrant account holder, as well as to payments it makes to another FFI unless that FFI meets certain requirements.

For jurisdictions which have signed the IGAs, the implementation of FATCA will be subject to their respective agreements.

Immediate Actions Required

  • You need to determine if your entity qualifies as a FFI.
  • If your entity meets the criteria of FFI under FATCA, unless otherwise exempt, you must register with the IRS Registration Portal and to appoint a Responsible Officer and a Contact Person for FATCA purpose. A GIIN will be assigned to a FFI after completing the registration process.
  • Depending on the terms of the IGA signed, local government may impose additional FATCA requirements on top of those required by the IRS.
  • Subject to the terms of the signed IGA, the IRS, generally, does not require the registered FFI to submit reports if there is no US reportable account, i.e. no specified US person being identified.
  • If a specified US person has been identified, the registered FFI will have a reportable account which obliges you to make an annual report on such account to the IRS or local government agencies depending on the type of IGA signed between the government of the place of incorporation of your company and the US.
  • An entity which meets the criteria of a FFI under FATCA may breach the domestic regulations if you do not comply with FATCA requirements when the government of the place of incorporation of your entity made the FATCA requirements as local regulations pursuant to the signed IGA.

For more information about FATCA, you may refer to the relevant US IRS webpage for details.

Other countries have since followed the FATCA example and there are now global initiatives underway to automatically exchange tax information via IGAs. This includes UK FATCA, which is in a similar format, but seeking to identify UK taxpayers. UK IGAs have been signed by all UK Overseas Territories (BVI, Cayman, etc.), and Crown Dependencies (Jersey, Guernsey and Isle of Man).

OIL, in its capacity solely as a registered agent of offshore companies, is not deemed to be an FFI – so, in the majority of its clients, it will not be required to report. However, FATCA has far-reaching impact and it is not possible to circumvent the regulations: all entities will need to consider and understand their own FATCA status.

In addition, clients will start to receive FATCA related documentation from their banks and other financial institutions: this will often include a W-8-BEN-E form, which acts as a self-certification document (although some jurisdictions have prepared their own certification document).

FATCA is now in operation. We suggest you speak with your tax advisor to determine the most appropriate course of action for your entity.

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.

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