Dayle O. Blair, Contributor
Who will be impacted by FATCA?
THE FOREIGN Account Tax Compliance Act (FATCA) is an important development in the United States' (US) efforts to improve tax compliance, with the Internal Revenue Services (IRS) focusing on Specified Foreign Financial Assets (SFFA) and off-shore accounts in order to catch tax dodgers and tax cheats.
If a person or entity falls in one of the following two categories, they will be impacted by FATCA.
1. US taxpayers, whether living in the United States or overseas, who hold SFFA that exceed certain thresholds, must report those assets to the IRS by attaching to the tax returns for tax years beginning 2011 onwards.
What are the reporting thresholds for taxpayers living in the US?
Unmarried taxpayers living in the US: The total value of SFFA is more than US$50,000 on the last day of the tax year, or more than US$75,000 at any time during the tax year.
Married taxpayers filing a joint income tax return and living in the US: The total value of SFFA is more than US$100,000 on the last day of the tax year, or more than US$150,000 at any time during the tax year.
Married taxpayers filing separate income tax returns and living in the US: The total value of SFFA is more than US$50,000 on the last day of the tax year, or more than US$75,000 at any time during the tax year.
What are the reporting thresholds for taxpayers living abroad?
You are a taxpayer living abroad, if you are a US citizen whose tax home is in a foreign country and you are either a bonafide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year; or you are a US citizen or resident, who during a period of 12 consecutive months ending in the tax year, is physically present in a foreign country or countries for at least 330 days.
You are filing a return other than a joint return and the total value of your SFFA is more than US$200,000 on the last day of the tax year or more than US$300,000 at any time during the year; or you are filing a joint return, and the value of your SFFA is more than US$400,000 on the last day of the tax year or more than US$600,000 at any time during the year.
Penalties for non-compliance by taxpayers
A person's failure to comply may result in civil penalty not to exceed US$50,000. Criminal penalties may also apply.
2. Beginning 2014, foreign financial institutions (FFI) will be required to report directly to the US government information about financial accounts held by US taxpayers, or held by foreign entities in which US taxpayers hold a substantial ownership interest.
What information must a FATCA compliant FFI provide?
The basic obligation is to disclose details of all "financial accounts" maintained by an FFI for US persons. This includes any individual who is a citizen or resident of the US. The disclosure is required not only in relation to direct account holders, but also to any substantial US owners of account holders, such as US shareholders in a Jamaican company. Financial accounts include any depository or custodial accounts maintained by an FFI, any shareholding or debt holdings in the FFI.
The reporting to the IRS will take the form of an annual report on each US account, and includes an obligation to provide any further information about those accounts which the IRS may request.
The information that must be provided include the name, address and US taxpayer identification number of each account holder who is a specified US person, the year-end account balance or value and the gross receipts and gross withdrawals or payments from the account.
The withholding obligations
If an FFI does not comply with the disclosure obligations imposed by FATCA, a withholding tax is applied to payments made to the FFI by US-based entities, and also to payments made to it from other FFIs that are FATCA compliant.
If a US account holder refuses consent for an FFI to pass its information to the IRS, it will be a "recalcitrant account holder", and payments made by it, and accounts held by it, will be subject to a 30 per cent withholding tax.
If a jurisdiction enters into an Intergovernmental Agreement (IGA) to implement FATCA, the reporting and other compliance burdens on the financial institutions in the jurisdiction may be simplified. Such financial institutions will not be subject to withholding tax under FATCA.
FATCA is an important piece of legislation that may affect all financial institutions in every country in the world, therefore, the way forward is to comply as best as possible, given the severe consequences of non-compliance.
Dayle O. Blair is an attorney-at-law, certified public accountant and a certified international tax adviser. He can be reached for comments at firstname.lastname@example.org, email@example.com or 876-906-1016 or 876-625-9680.