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Know your FATCA

Know your FATCA

US Foreign Account Tax Compliance Act due 2013 will have a far-reaching impact

The Bahamas Investor Magazine
January 20, 2012
January 20, 2012
Lawrence Lewis

FATCA stands for the Foreign Account Tax Compliance Act. It colloquially refers to certain provisions included in the Hiring Incentives to Restore Employment (HIRE) Act signed into law on March 18, 2010 and effective January 1, 2013. It adds a new chapter to the Internal Revenue Code (Chapter 4) aimed at addressing perceived tax abuse by US persons through the use of offshore accounts.

The new rules require foreign financial institutions (FFIs) to enter into an agreement with the US Treasury and provide information on certain US persons invested in accounts outside of the US and for certain non-financial foreign entities (NFFEs) to provide information about any “substantial” US owners.

Non-participating FFIs or NFFEs that do not comply are subject to 30 per cent withholding on all US source withholdable and “passthru” payments received.

An FFI is any non-US entity that:
• Accepts deposits in the ordinary course of a banking or similar business;
• As a substantial portion of its business, holds financial assets for the account of others; or
• Is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest in such securities, partnership interests, or commodities.

FATCA requirements
FATCA requires a withholding agent and participating FFIs to deduct and withhold 30 per cent on any withholdable or “passthru” payment made to FFIs that do not comply with FATCA and NFFEs who do not report substantial US owners or certify no substantial US ownership.

A withholdable payment is:
• Any payment of interest (including any portfolio interest and original issue discount), dividends, rents, royalties, salaries, wages, annuities, compensations, remunerations, emoluments, licensing fees and other FDAP (fixed or determinable annual or periodical) income, gains, and profits, if such payment is from sources within the US; or
• Any gross proceeds from the sale or disposition of property of a type that can produce interest or dividends from sources within the US.

Income effectively connected with a US business is generally exempt from withholding under FATCA.

“Passthru” payments
Certain “passthru” payments will also be subject to FATCA–a passthru payment generally includes the amount of a payment that is withholdable plus any portion of a payment that is not withholdable multiplied by the entity’s so called “passthru payment percentage.”

Generally non-US entities such as banks, certain insurance companies, hedge funds, trusts, broker/dealers, securitization vehicles, and private equity funds will be considered FFIs.

In general, the FFI Agreement requires the FFI to make a determination of which of its accounts are US accounts, and then annually report those accounts to the US Treasury.

Specifically, the FFI must agree to the following:

  • a. Obtain information regarding each holder of each account maintained by the FFI as is necessary to determine which accounts are US accounts;
  • b. Comply with verification and due diligence procedures as the US Treasury requires with respect to the identification of US accounts;
  • c. Report annually certain information with respect to any US account maintained by the FFI;
  • d.Deduct and withhold 30 per cent from any passthru payment that is made to:
    • (i) A recalcitrant account holder (any account holder that: (1) fails to comply with reasonable requests for information necessary to determine if the account is a US account; (2) fails to provide the name, address, and TIN of each specified US person and each substantial US owner of a US owned foreign entity; or (3) fails to provide a waiver of any foreign law that would prevent the foreign financial institution from reporting any information required under this provision),
    • (ii) Another financial institution that does not enter into an FFI Agreement, or
    • (iii) An FFI that has elected to be withheld upon rather than to withhold with respect to the portion of the payment that is allocable to a recalcitrant account holder or to FFIs that do not have an FFI Agreement;
  • e. Comply with requests by the US Treasury for additional information with respect to any US account maintained by such institution; and
  • f. Attempt to obtain a waiver in any case in which any foreign law would (but for a waiver) prevent the reporting of information required by chapter 4 with respect to any US account maintained by such institution, and if a waiver is not obtained from each account holder within a reasonable period of time, to close the account.
  • Not all US account holders in FFIs are subject to information reporting. Generally, US individuals, partnerships, trusts, estates and privately-held corporations, which are taxable entities, will be subject to information reporting by FFIs, while US tax-exempt entities, certain regulated financial entities, and publicly-held corporations and affiliates will be excluded.

    Although FATCA does not become effective until January 1, 2013, (and certain provisions even later), companies need to start preparing now. Certain activities will take significant time to implement, in some cases 18-24 months for projects such as system changes. An initial pilot analysis should be performed so that budgets and timelines are formulated appropriately.

    As stated in IRS Notice 2011-53, an FFI that enters into an FFI Agreement by June 30, 2013, will be identified as a participating FFI and thus avoid FATCA withholding that will begin January 1, 2014.

    FFIs that enter FFI Agreements after June 30, 2013, but before January 1, 2014, will be considered participating FFIs for 2014, however, they may be subject to FATCA withholding due to the lack of time to identify them as participating FFIs before FATCA withholding begins on January 1, 2014. The effective date for FFI Agreements entered before July 1, 2013, will be July 1, 2013, and any FFI Agreement entered into after June 30, 2013, will be the date the FFI enters the FFI Agreement.

    Due diligence
    New account due diligence procedures generally must be in place from the effective date of the FFI Agreement. Certain due diligence procedures for pre-existing private banking accounts with a value of at least $500,000 will need to be performed within one year from the effective date of the FFI Agreement and for pre-existing private banking accounts of a lower value by the later of December 31, 2014 or the first year anniversary of the FFI Agreement.

    For all other pre-existing accounts, due diligence procedures must be performed within two years of the effective date of the FFI Agreement. There are some questions you should be thinking about already:
    • Who is championing the FATCA initiative in your organization?
    • Is there a governance structure in place to oversee and monitor FATCA compliance and have a project leader and key stakeholders been identified?
    • Has the organization completed an assessment of the impact and costs of FATCA?
    • Are there any strategic business decisions that need to be made? Some of these may involve exiting certain markets.
    • Have budgets for FATCA implementation and compliance been established?
    • Is the organization addressing any legal concerns related to FATCA?
    • What is the internal and external communication plan regarding FATCA, which can be critical for discussions with customers, analysts, investors and other stakeholders?

    In most situations, FATCA will be a very far-reaching undertaking for withholding agents and FFIs, and organizations should not underestimate the effort required to comply.

    Bio: Lawrence Lewis

  • Lawrence Lewis is Deloitte’s lead partner for the Foreign Account Tax Compliance Act (FATCA) initiative for The Bahamas and Turks & Caicos Islands. In this capacity, he works with the Deloitte US Tax Information and Reporting Practice as they deploy cross-functional talent to the global marketplace in response to the demanding requirements of the provisions of the FATCA regime. Lawrence is also the Enterprise Risk Services practice leader with over 16 years of professional experience serving clients in The Bahamas, throughout the Caribbean and in Canada. He is a certified public accountant (CPA), chartered accountant (CA) and a certified information systems auditor (CISA).
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