Passed in 2010, as part of the HIRE Act, the Foreign Account Tax Compliance Act (FATCA) targets non-compliance by U.S. persons holding accounts and other financial assets offshore via withholding requirements that are imposed on financial institutions and reporting requirements imposed on specified persons.
What is FATCA?
Part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010, the Foreign Account Tax Compliance Act (FATCA) is a U.S. effort to combat tax evasion by U.S. persons holding accounts and other financial assets offshore.
Under FATCA, foreign financial institutions (FFI) and certain other non-financial foreign entities are generally required to report foreign assets held by US account holders or be subject to withholding on withholdable payments.
FATCA also requires certain U.S. taxpayers holding financial assets outside the United States to report those assets to the IRS or face serious penalties.
An FFI must obtain the client's consent in order to submit such reports. A client who does not consent is considered a “recalcitrant account holder” – someone who has failed to provide the FFI maintaining its account with the required information listed under §1.1471-5(f). In the case of such clients, FFIs must withhold 30% on all U.S. withholdable payments as defined by the IRS FATCA regulations.
FATCA requires a 30% withholding tax on U.S. source payments of fixed or determinable, annual or periodical income (FDA) unless FATCAs requirements regarding payee documentation are met in full.
What is a foreign financial institution?
A foreign financial institution or FFI is defined by FATCA as any financial institution that is a foreign entity and which accepts deposits in the ordinary course of banking or a similar business, holds financial assets for others as a substantial portion of its business, or is primarily engaged in the business of investing, reinvesting or trading securities, partnership interests, commodities or any interest (including futures and forward contracts) on the aforementioned assets.
These foreign financial institutions include, but are not limited to:
- Depository institutions like banks
- Custodial institutions like mutual funds
- Investment entities like private equity or hedge funds
- Certain types of insurance companies with cash value products or annuities
- Direct reporting non-financial foreign entities
- Sponsoring entities
The IRS provides free access to their FATCA FFI list search and download tool which gets updated monthly.
What are specified foreign financial assets?
Specified foreign financial assets are foreign financial accounts and foreign non-account assets held for investment (as opposed to held for use in a trade or business) - including
- depository or custodial financial accounts maintained at foreign financial institutions, and
- to the extent not held in an account at a financial institution:
- stocks or securities issued by foreign corporations,
- any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person
- any interest in a foreign entity.
What is a withholding agent?
Any U.S. or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding is considered a withholding agent.
How does FATCA work?
FATCA requires both certain U.S. taxpayers and certain foreign financial institution to report specified foreign financial assets to the IRS. FATCA imposes withholding requirements on financial institutions and reporting requirements on specified persons.
Certain U.S. taxpayers holding financial assets with an aggregate value of more than the reporting threshold offshore must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. This 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).
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.
Exceptions to the requirement to file Form 8938:
- If you do not have to file a U.S. income tax return for the year, then you do not have to file Form 8938, regardless of the value of your specified foreign financial assets.
- If you report interests in foreign entities and certain foreign gifts on other forms, you may just list the submitted forms on Form 8938, without repeating the details.
What happens if you must file Form 8938, and do not do so?
If you must file Form 8938, Statement of Specified Foreign Financial Assets, 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,
- a 40% penalty on an understatement of tax attributable to non-disclosed assets.
Which countries follow FATCA?
Currently, there are 113 countries worldwide that have existing FATCA model agreements – including the United Kingdom, Australia, and Singapore. And there are 95 countries that have no FATCA agreements with the U.S. – including tax havens like Belize, Argentina, and Monaco.
Does Switzerland comply with FATCA?
To combat international tax evasion, the U.S. and Switzerland formally signed a FATCA agreement on February 14, 2013 and implemented it into force on June 2, The Swiss FATCA Intergovernmental Agreements (IGA) contains the following stipulations:
- Swiss financial institutions must enter into an agreement with the IRS that provides for the delivery of information on U.S. accounts directly to the IRS rather than via government bodies.
- All the FFI agreements should be signed by the end of 2013 for Swiss FFIs.
- FFIs are not obliged to report the names of recalcitrant U.S. clients, make a tax deduction for such clients, or terminate the client relationship with them. A client who does not consent to the transmission of data by an FFI to the Service is considered recalcitrant.
- This being said, the United States can request administrative assistance concerning recalcitrant clients by means of group requests based on the administrative procedure provided for by the Swiss-U.S. double tax treaty (DTT), if applicable.
- Swiss financial institutions benefit from a simplified procedure for the identification of clients.
- Certain financial institutions that operate primarily on a local or regional basis are deemed compliant with FATCA.
- The agreement also clarifies the treatment of investment vehicles. For example, the insurance (property insurers) and the pension industry (social security funds, private retirement funds) are out of FATCA's scope of application.
- Independent asset managers are relieved of the obligation to conclude a FATCA agreement.
Who is required to report under FATCA?
Both withholding agents and account holders are required to report under FACTA. However, different reporting requirements and forms apply to withholding agents and account holders.
Is FATCA only for U.S. citizens?
FATCA targets non-compliance by U.S. taxpayers using withholding requirements imposed on financial institutions and reporting requirements imposed on specified persons.
A specified person includes:
- any specified individual or
- a specified domestic entity if it is formed or availed of to hold specified foreign financial assets
For specified individuals
The FATCA filing requirement applies to specified individuals like U.S. citizens, green card holders, resident aliens of the U.S. for any part of the tax year, nonresident aliens who make an election to be treated as a resident alien for the purposes of filing a joint income tax return, nonresident aliens who are bona fide residents of Puerto Rico, Guam, American Samoa, the Northern Mariana Islands, and the U.S. Virgin Islands. However, the reporting threshold differs for those residing in the United States vs. those living in a foreign country.
For specified domestic entities
FATCA filing requirements impact businesses (specified domestic entities) if they are formed or availed of to hold specified foreign financial assets. This includes certain domestic corporations, partnerships, and trusts that are considered formed or availed of for the purposes of holding, directly or indirectly, specified foreign financial assets.
What is the threshold for FATCA reporting?
FATCA reporting thresholds vary based on whether you file a joint income tax return or live abroad. Taxpayers living outside the U.S. are considered to live abroad if they are a U.S. citizen whose tax home is in a foreign country and they have been present in that foreign country or countries for at least 330 days out of a consecutive 12-month period.
FATCA filing threshold for taxpayers residing in the U.S.
- If single or filing separately from your spouse, you must submit a Form 8938 if you have more than $50,000 of specified foreign financial assets at the end of the year
- If filing jointly with your spouse, the reporting threshold doubles to $100,000
FATCA filing threshold for taxpayers living abroad
- If single or filing separately from your spouse, you must submit a Form 8938 if you have more than $200,000 of specified foreign financial assets at the end of the year
- If filing jointly with your spouse, the reporting threshold doubles to $400,000
Which assets are exempt from FATCA reporting?
Generally, foreign assets held by an FFI are not subject to FATCA withholding if the FFI:
- enters into an agreement with the IRS under which it assumes specific due diligence, reporting and withholding obligations (a participating FFI),
- is treated as a deemed-compliant FFI, or
- is subject to, and complies with, an intergovernmental agreement.
The following assets are also exempt from the FATCA filing requirement because they are not considered specified foreign financial assets:
- A financial account maintained by a U.S. payor. A U.S. payor includes a U.S. branch of a foreign financial institution, a foreign branch of a U.S. financial institution, and certain foreign subsidiaries of U.S. corporations. Therefore, financial accounts with such entities do not have to be reported.
- A beneficial interest in a foreign trust or a foreign estate, if you do not know or have reason to know of the interest. If you receive a distribution from a foreign trust or foreign estate, however, you are considered to have knowledge of your interest in the trust or estate.
- An interest in a social security, social insurance, or other similar program of a foreign government.
- A financial account is not a specified foreign financial asset if the mark-to-market accounting rules for securities dealers in Code Sec. 475(a) apply to all of the holdings in the account or an election under Code Sec. 475(e) or Code Sec. 475(f) is made with respect to all of the holdings in the account.
- An asset is not a specified foreign financial asset if the rules of Code Sec. 475(a) apply to the asset or an election under Code Sec. 475(e) for commodities dealers or commodity traders under Code Sec. 475(f) is made with respect to the asset.
This information was last updated on 01/10/2022.