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Foreign Account Tax Compliance Act (FATCA)

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

Passed as part of the Hiring Incentives to Restore Employment (HIRE) Act in 2010, the Foreign Account Tax Compliance Act (FATCA) is intended to help the U.S. government fight tax evasion by U.S. persons who hold accounts and other financial assets offshore. It requires U.S. residents to report, depending on the value, their foreign financial accounts and foreign assets. Under the law, foreign financial institutions and certain other non-financial foreign entities are also required to report on the foreign assets held by their U.S. account holders or be subject to withholding on withholdable payments.  

 

What does FATCA mean for financial institutions?

Under FATCA, all financial institutions – U.S.-domestic and foreign – must classify account holders as either U.S. or non-U.S.-based, and foreign financial institutions (FFIs) are expected to identify U.S. account holders and disclose their balances, receipts and withdrawals to the IRS. FATCA requires that U.S. withholding agents withhold tax at the rate of 30 percent from all passive payments, such as interest and dividends, paid to a foreign recipient. It will have a significant effect on two classes of companies: U.S. financial institutions, and U.S. companies that make payments to foreign entities.

 

FATCA also requires certain foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The reporting institutions include not only banks, but also other financial institutions, such as investment entities, brokers, and certain insurance companies. Some non-financial foreign entities will also have to report certain of their U.S. owners.

 

What does FATCA mean for individuals living in the U.S.?

Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. This FATCA requirement is in addition to the long-standing requirement to report foreign financial accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) (formerly TD F 90-22.1).

 

FATCA requires certain U.S. taxpayers who hold foreign financial assets with an aggregate value of more than the reporting threshold (at least $50,000 on the last day of the tax year, or at least $75,000 at any point during the tax year) to report information about those assets on Form 8938, which must be attached to the taxpayer’s annual income tax return. The reporting threshold is higher for certain individuals, including married taxpayers filing a joint annual income tax return (at least $100,000 on the last day of the tax year, or at least $150,000 at any point during the tax year) and certain taxpayers living in a foreign country.

 

Which assets need to be reported on Form 8938 under FATCA?

All specified foreign financial assets, including foreign financial accounts and foreign non-account assets held for investment (as opposed to held for use in a trade or business), must be reported on Form 8938.

 

Foreign stock or securities held outside of a financial account must be reported if the value exceeds the threshold, while foreign stock or securities held inside of a financial account don’t have to be reported. Any interest in real estate held through a foreign entity, such as a corporation, partnership, trust or estate, if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you. 

 

Any sales contract with a foreign person to sell assets held for investment, such as precious metals, or gold certificates issued by a foreign person is a specified foreign financial asset investment asset that must be reported on Form 8938 if the total value of all your specified foreign financial assets is greater than the reporting threshold that applies to you. An interest in a foreign pension or deferred compensation plan, or in a foreign estate, must be reported if the value of your interest exceeds the reporting threshold.

 

What are the FATCA rules for U.S. domestic entities?

Under final rules issued by the U.S. Treasury Department in February 2016, any “specified domestic entity” that has any interest in a “specified foreign financial asset” during the taxable year must attach Form 8938 to its tax return, staring with the 2016 tax year. These rules apply to closely held domestic U.S. corporations, domestic partnerships, and domestic trusts. A domestic corporation is deemed to be “closely held” by a specified individual if at least 80 percent of the total combined voting power of all classes of stock of the corporation entitled to vote, or at least 80 percent of the total value of the stock of the corporation, is owned, directly, indirectly, or constructively, by a specified individual on the last day of the corporation’s taxable year. The preamble to the Final Regulations specifies that this 80-percent threshold should exempt most publicly traded partnerships from being considered “specified domestic entities.”

 

Domestic corporations and partnerships are considered to have been “formed or availed of” for purposes of holding specified foreign financial assets if (1) the entity is “closely held” by a specified individual and (2) at least 50 percent of the entity’s gross income for the taxable year is passive income or at least 50 percent of the assets held by the entity for the taxable year are assets that produce or are held for the production of passive income. According to the final regulations, the percentage of passive assets held by a corporation or partnership for a taxable year is the weighted average percentage of passive assets (weighted by total assets and measured quarterly), and the value of assets of a corporation or partnership is the fair market value of the assets or the book value of the assets that is reflected on the corporation’s or partnership’s balance sheet (as determined under either a U.S. or an international financial accounting standard).

 

What are the penalties for non-compliance with FATCA reporting requirements?

If you must file Form 8938 and do not do so, you may be subject to penalties: a $10,000 failure to file penalty, an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40 percent penalty on an understatement of tax attributable to non-disclosed assets.

 

The statute of limitations is extended to six years after you file your return if you omit from gross income more than $5,000 that is attributable to a specified foreign financial asset, without regard to the reporting threshold or any reporting exceptions. If you fail to file or properly report an asset on Form 8938, the statute of limitations for the tax year is extended to three years following the time you provide the required information. If the failure is due to reasonable cause, the statute of limitations is extended only with regard to the item or items related to such failure and not for the entire tax return.

 

However, if you show that any failure to disclose is due to reasonable cause and not due to willful neglect, no penalty will be imposed for failure to file Form 8938. Reasonable cause is determined on a case-by-case basis, considering all relevant facts and circumstances.

The Filing Cabinet Blog

Critics seek to slay FATCA through tax reform

Joe Mont | March 22, 2017

A coalition of business leaders is looking to repeal the Foreign Account Tax Compliance Act as part of any tax reform initiative in Congress.

GRC Announcements Blog

Tipalti adds accounts payable tax compliance support for Argentina and Brazil suppliers

GRC Announcements | September 12, 2016

Tipalti, a global supplier of payments automation, has extended its accounts payable tax compliance capabilities to help companies collect and validate tax IDs from their suppliers in Argentina and Brazil. Businesses engaging with suppliers and partners in those countries can now ensure tax compliance by recording tax information for those payees.

The Filing Cabinet Blog

Podcast: Getting a Grip on Legal Entity Compliance

Joe Mont | December 1, 2014

Not only is identifying every party to a financial transaction complex, regulators are paying closer attention to the topic, known as legal entity management. In this week’s podcast, we talk to Ron Jordan, chief data officer for the Depository Trust and Clearing Corp., a post-trade financial services company, about improving the quality of such data and the steps that can alleviate a growing regulatory burden.

Accounting & Auditing Update Blog

OECD Completes FATCA-Like Regime With New Obligations

Tammy Whitehouse | October 30, 2014

Plowgian

The Organization for Economic Co-Operation and Development has finished the Common Reporting Standard to govern the exchange of tax information among more than 50 countries. While the United States is not a participant, says KPMG principal Michael Plowgian, subsidiaries or branches of U.S. entities will need to comply in the jurisdictions where authorities are signing onto the OECD plan.  More inside.

Grapevine Blog

W&T Offshore general counsel retires

Scuttlebutt | May 1, 2017

W&T Offshore announced the retirement of Thomas Getten as vice president, general counsel, and secretary. He is succeeded by Shahid Ghauri, who joined the company in March 2017.

 

Grapevine Blog

Air Products appoints general counsel

Scuttlebutt | May 1, 2017

Air Products, an industrial gases company, has appointed Sean Major as executive vice president and general counsel, effective May 1.

Grapevine Blog

Twist Bioscience appoints chief ethics and compliance officer

Scuttlebutt | May 1, 2017

Twist Bioscience, a company accelerating science and innovation through rapid, high-quality DNA synthesis, today announced the appointment of Mark Daniels to the newly created position of chief ethics and compliance officer.

Grapevine Blog

Kara Novaco Brockmeyer joins Debevoise

Scuttlebutt | May 1, 2017

Debevoise & Plimpton today announced that Kara Brockmeyer, former Chief of the SEC Enforcement Division’s Foreign Corrupt Practices Act Unit, is joining the firm’s Washington, D.C. office as a partner.

White Paper

The OCEG GRC Illustrated Series: Best Practices for Tracking Third Party Risk

Sponsored by OCEG | May 2, 2017

OCEG and Thomson Reuters have developed a new installment in OCEG's GRC Illustrated Series to outline the best practices your organization should have in place to ensure ongoing, integrated due diligence of your third party risks.

Grapevine Blog

Allied Irish Banks names new chief risk officer

Scuttlebutt | April 21, 2017

Allied Irish Banks has appointed Deirdre Hannigan as chief risk officer, effective April 24. Hannigan joins AIB from the National Treasury Management Agency, where she was chief risk officer.
Grapevine Blog

Falcon Group appoints chief risk officer

Scuttlebutt | April 21, 2017

Falcon Group, a Swiss private banking boutique, has appointed Bruno Meyer to the newly created role of chief risk officer and a member of the executive board, effective July 1.

Grapevine Blog

Federal Home Loan Bank San Francisco names chief risk officer

Scuttlebutt | April 21, 2017

The Federal Home Loan Bank of San Francisco has appointed Lisa Violet as senior vice president and chief risk officer.

White Paper

The Compliance Journey: Boosting the value of compliance in a changing regulatory climate

Sponsored by KPMG | April 24, 2017

To understand how organizations view the maturity of their compliance programs, KPMG surveyed CCOs from major organizations across seven industries. These Survey results can provide CCOs with vital information on areas of relative strength and areas for further enhancement.

Grapevine Blog

Morgan Stanley names new chief compliance officer

Scuttlebutt | April 18, 2017

Morgan Stanley's chief compliance officer Billy Fenrich is leaving the firm after just one year in the role. He will be replaced by Raul Yanes, a partner at law firm Davis Polk & Wardwell.