FATCA Tax Compliance Law Goes into Effect July 1

By Roy Maurer Jun 19, 2014

The law intended to recoup federal tax revenues from U.S. taxpayers holding assets in offshore accounts goes into effect July 1, 2014.

The Foreign Account Tax Compliance Act (FATCA) requires U.S. taxpayers, including those living and working overseas, to report their financial accounts held outside the United States, and requires foreign financial institutions such as banks, asset management and investment funds, and insurance companies to report to the U.S. government about their U.S. clients. The United States levies income taxes on its citizens, regardless of residency, and therefore requires Americans living abroad to pay U.S. taxes on foreign income. The U.S. Treasury Department estimates that as much as $100 billion is lost annually to offshore tax noncompliance.

Key Provisions of FATCA

U.S. taxpayers owning financial assets in excess of $50,000 in foreign accounts must report those assets every year on a new Form 8938 to be filed with the 1040 tax return.

FATCA will also impact U.S.-based companies as well as foreign companies with U.S. assets or clients. The law requires foreign financial institutions (FFIs) to enter into an agreement with the Internal Revenue Service to identify their U.S. account holders and to disclose the account holders’ names, tax identification numbers, addresses and the transactions of most types of accounts. Some types of accounts, notably retirement savings and other tax-favored products, may be excluded from reporting on a country-by-country basis.

If an FFI does not enter into an agreement with the IRS, all relevant U.S.-sourced payments, such as dividends and interest paid by U.S. corporations, will be subject to a 30 percent withholding tax. “That is a very big undertaking, and makes FATCA, in effect, a global regulation,” said Laura Heeger, chief compliance officer for MetLife’s Europe, Middle East and Africa operations. Heeger formerly ran the anti-corruption unit for the insurance giant, and handled FATCA and corruption compliance issues for global operations.

Accordingly, FFIs must agree to comply with due diligence procedures in order to identify U.S. account holders, report information on U.S. account holders to the IRS on an annual basis, comply with requests by the IRS for additional information, obtain waivers from each U.S. account holder of domestic law that would otherwise prevent the disclosure of such information, and act as a withholding agent on certain foreign “pass-thru” payments made to recalcitrant account holders and nonparticipating FFIs. Certain nonfinancial foreign entities must report identifying information about their substantial U.S. account holders or certify that they have no substantial U.S. account holders.

It’s all about the documentation, said Heeger, including “understanding who has to pay U.S. taxes and how to prove we’ve done our due diligence to the U.S. government. What makes this regulation different from others from a compliance perspective is that not only do you have to be compliant, but you can’t make a payment to a company that isn’t,” she explained. “We are not only charged with embedding this in our own procedures, but enforcing it against other companies.”

Once FFIs register with the IRS through the agency’s website, they will receive a notice that the registration has been accepted and will be issued a Global Intermediary Identification Number (GIIN), to be used for reporting purposes. Approximately 77,000 banks and financial institutions from 70 countries have already registered, according to news reports. Reuters reported that more than 500 U.S. businesses have also registered, including Citibank and JPMorgan Chase.

Transition Period

The IRS issued a notice in May 2014 announcing that calendar years 2014 and 2015 will be regarded as a “transition period” for FATCA enforcement. The transition period is “intended to facilitate an orderly transition” for financial institutions struggling to achieve FATCA compliance, according to the IRS.

Take note that the July 1, 2014, effective date is not postponed and the legal obligations imposed by FATCA have not changed. “An entity that has not made good-faith efforts to comply with the new requirements will not be given any relief from IRS enforcement during the transition period,” the notice states. The IRS is just letting the international financial community know that a good-faith attempt at compliance will be acceptable until January 2016.

Instead of aggressive policing of reporting accuracy, the IRS may check on the status of FFIs’ filing of W-8 and W-9 forms and take into account whether a withholding agent has made reasonable efforts to modify its account opening practices and procedures.

International Controversy

There has been plenty of controversy over the implementation of FATCA, including its cost, complexity, lack of regulatory clarity, and its effect on international relations. The punitive withholding penalty may create a strong incentive for foreign financial institutions to divest U.S. assets. The collection of data on U.S. citizens living abroad has raised concerns about compliance with local data privacy laws, leading the IRS to devise Intergovernmental Agreements with participating nations, which either remove those hurdles or offer reciprocal reporting arrangements so they can check up on their citizens in the U.S.

As of June 13, 2014, 36 nations had signed agreements with the IRS, including Australia, France, Germany, Japan, Mexico, South Africa, the United Arab Emirates and the United Kingdom.Many places where Americans have traditionally hidden assets, including Switzerland, the Cayman Islands and the Bahamas, have signed agreements as well. Forty-two other nations have reached “agreements in substance.” A complete list can be found here.

There have also been reports of foreign banks refusing to open accounts for Americans, making it harder for U.S. expats to live and work abroad. “Many Americans abroad who are not yet in compliance now face a lose-lose situation,” said Marylouise Serrato, executive director of American Citizens Abroad, an advocacy group for U.S. expats. “They don’t know how to become compliant without excessive financial penalties even though they owe little or no taxes, and they have lost access to banking services essential for daily living in their country of residence. Even Americans abroad who are in full compliance with U.S. taxes are extremely bitter about their treatment under the unique citizenship-based taxation system of the United States,” she said.

Preparing for FATCA

Heeger said that she’s seen companies preparing for the impending deadline in different ways. “MetLife is actively preparing for implementation,” she said. “We built a compliance program and created new roles necessary for compliance, such as the Responsible Officer, who sits at every entity level. At MetLife there are hundreds of these. Every investment fund, every mutual fund, every single one of them has an RO and is registered with the IRS indicating whether or not they are compliant.”

Additionally, the company updated and implemented new technology to collect, monitor and store FATCA-related information and data; updated business processes, policies and procedures such as customer onboarding, administration and claims; and changed application, contract and policy wording to support FATCA activities and address conflicts of local law to reduce potential liabilities.

The ability to align key stakeholder departments is critical to successfully complying with FATCA. PricewaterhouseCoopers recommended that financial institutions and multinational corporations consider steps such as:

  • Analyzing legal entity structures and registering FFIs that are required to register.
  • Conducting gap analyses to identify systems and processes that must be updated.
  • Developing an implementation plan for the changes required for FATCA compliance.
  • Performing due diligence on pre-existing account holders and remediating noncompliant accounts.
  • Evaluating controls related to FATCA compliance.

Roy Maurer is an online editor/manager for SHRM.

Follow him at @SHRMRoy

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