FATCA (Foreign Account Tax Compliance Act) is a law that was adopted in the US as part of the HIRE Act on 18 March 2010, and added to the US Income Tax Internal Revenue Code (IRC). With significant involvement of foreign financial institutions (globally) it is designed to make it more difficult for US taxpayers to hide income from the IRS (Internal Revenue Service, IRS) through the use of foreign accounts and securities accounts. FATCA is aimed particularly at identifying US taxpayers holding offshore accounts indirectly through intermediary companies. The intent is to reduce the estimated annual tax losses amounting to approx. $ 100 bn in this way. The finance sector worldwide could be facing estimated (one-off) compliance costs in the amount of up to $ 1.000 bn.

Disclosure obligations of financial institutions

Based on the FATCA rules (from the perspective of the United States) foreign financial institutions (FFIs) that conclude an appropriate (model) agreement with the US Treasury (FFI Agreement) will be exposed to extensive disclosure requirements with respect to US accounts. The FATCA rules complement the existing commitments to a considerable extent under the Qualified Intermediary Program (QI Program) both personally and factually.

Originally FATCA was due to come into effect on 1 January 2013. Now a phased implementation of the new rules is intended, which – depending on the subject – will include staggering the implementation over six months to two years.

(Penalty) withholding tax

If the FFI does not conclude a FFI Agreement, or if it cannot demonstrate that it has complied with disclosure requirements, FATCA requires the US paying agent to impose an additional (withholding) tax amount to 30% on certain payments to the FFI from US sources (withholdable payments). Withholding tax applies in particular to the following payments:

• Regular income from US sources, such as interest, dividends and rents,
• Proceeds from the sale of shares, debt securities and other securities.

The 30% withholding tax also applies to payments from indirect US investments, such as investment funds (pass-through payments). What it does not cover is recognised income that is directly related to a US business activity (effectively connected income).

FATCA does not only apply to banks

Instead FATCA applies across the board to those receiving payments from US sources, either as foreign financial institutions (FFI) or beneficial owners or non-financial foreign entities (NFFEs). FFIs means individuals and legal entities who/which:

• Accept deposits in normal banking or similar business,
• Hold financial assets on behalf of others as a commercial operation, e.g. as stock brokers, traders, clearing organisations, or
• Are active in investment business, in particularly investment, reinvestment or trading in securities, partnership interests, commodities, or have rights pertaining to them (incl. futures or options).

In addition to banks, this fundamentally includes insurance companies, investment funds, including private equity funds and hedge funds, securitisation companies and guarantors.

NFFEs in turn can be other foreign legal entities.

What does FATCA require?

To avoid withholding tax deduction, FFIs must contractually undertake to comply with the FATCA rules vis-a-vis the US Treasury. In particular, this includes:

• Observing the guidelines for identifying US taxpayers among clients (or account holders)
• Annual submission of information on the accounts of US clients to the Internal Revenue Service (IRS)
• Withholding tax deduction and retention on forwarded payments (pass-through payments) to customers who do not provide the requested information, and non-participating (non-compliant) FFIs,
• Submission of further information on US accounts on request.

NFFEs can only prevent 30% withholding tax deduction if they disclose major US shareholders (> 10%), or confirm that such shareholders do not exist.

What needs to be done?

Companies need to analyse their exposure to and the impact of FATCA, among other things in terms of their customer/shareholder structure and then determine their target status as a participating, non-participating or deemed-compliant FFI. FFIs who intend to contractually commit to complying with the obligations under FATCA must then, in particular based on the existing need for adjustment in view of existing business processes and IT systems, plan the implementation within the prescribed period prior to the implementation of the FATCA regulations. The involvement of the functions involved (IT, legal, tax, compliance, product development, sales, etc.) is crucial for establishing the compliance requirements in an efficient and requirements-compliant manner.

Support from BDO

BDO supports its clients in all phases of the process, including:

• Analysis of FATCA exposure in personal and material terms (tool-supported, if required), including deriving necessary measures for FATCA compliance,
• Establishing/adapting new customer acceptance process and internal and external reporting to ensure proper submission of information to the IRS,
• Reporting (also IT-based) on FATCA compliance (in terms of content/time).

Our multidisciplinary expertise, particularly in the areas of tax law, regulatory law and IT, gives our clients the confidence that all compliance-related aspects of the FATCA regime are covered.

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