FATCA (formally the 'Foreign Account Tax Compliance Act 2009') was passed by the U.S. government to reduce tax evasion by U.S. citizens who use 'foreign' (i.e. non-U.S.) accounts to conceal income and assets from the Inland Revenue Service ('IRS'). It came into force on 1 July 2014.
FATCA requires financial institutions outside the US, known as 'Foreign Financial Institutions' ('FFIs'), to identify U.S. accounts and their owners and assets to the IRS. FFIs include financial institutions receiving U.S. income or holding U.S. investments (eg. banks, investment managers etc).
Entities which are not 'financial institutions' but which receive U.S. income or hold U.S. assets also fall into the FATCA regime. These 'Non Financial Foreign Entities' ('NFFEs') must supply the name, address, and U.S. tax identification number of any U.S. person with a 'substantial' interest in the NFFE to the IRS. NFFEs may include trusts.
If FFIs and NFFEs do not comply with FATCA then the U.S. government will impose a withholding tax of 30% on US source income (such as interest, dividends, rent, salaries) or on the gross proceeds from the disposition of property which produces such income.
FFIs can avoid the 30% withholding tax by entering into a disclosure agreement directly with the IRS, or reporting information to HMRC which will pass it to the IRS under an Intergovernmental Agreement. NFFEs can avoid the tax by reporting details of U.S. persons with interests in the NFFE or confirming that there are no U.S. persons with such interests. Alternatively, NFFEs can apply to the IRS to be declared an 'excepted NFFE'. If the IRS accept that an NFFE is 'excepted', it will not be subject to the 30% withholding tax.
The U.S. is the only major economy to tax its citizens on their worldwide income wherever they live. FATCA is an unwelcome extension of the U.S. tax regime. It is doubtful whether the revenue generated by FATCA will outweigh the costs of complying with it. The latest guidance on FATCA was published by HMRC on 28th August 2014 and we are in the process of advising a number of clients who are concerned about the possible implications of it.
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.
