The Impact of FATCA on Foreign Financial Institutions

The Impact of FATCA on Foreign Financial Institutions

Foreign Account Tax Compliance Act (FATCA) was established to target tax evasion. Foreign Financial Institutions (FFI) that house U.S. taxpayers financial accounts are now required to report details regarding these accounts to the IRS. Even foreign entities in which U.S. taxpayers hold a substantial ownership interest need to be reported to the IRS. These requirements have made many foreign entities and financial institutions become reluctant to do business with Americans.

The Requirements of the IRS

FATCA seeks to curb tax evasion by increasing transparency in the financial activities of Americans overseas. Through FATCA, the IRS gains access to the financial information of Americans living abroad. For this purpose, the U.S. has made FATCA agreements with many foreign governments, including Mexico, France, Germany, Costa Rica, Switzerland, Denmark and Spain. These agreements allow the IRS to obtain information directly from FFIs.

Trusts, local banks, hedge funds, stock brokers and insurance companies are also considered FFIs. Trust companies and many family trusts are considered FFIs if they involve investment activities.

Reporting is only required for an American account holder of an FFI if they exceed a certain value threshold. Reporting requirements are typically not mandatory for those with little ownership interest or limited assets.

Obtaining a Global Intermediary Identification Number

A Global Intermediary Identification Number (GIIN) must be obtained by an FFI if their country has a FATCA agreement with the U.S. FFIs are required to register with the IRS, obtain a GIIN and begin to report certain information about qualifying U.S. clients to the IRS. To make registration easy for FFIs, the IRS has opened a new online registration system on their website.

FFIs can create an account by registering on the online registration system for financial institutions on the IRS website, If an FFI has a branch or an affiliate group, then it will need to provide information about the branch(es) and affiliate(s) as well. The online registration system is open 24 hours a day, 7 days a week.

FFIs can use the new registration system to:

  • Establish online accounts
  • Customize home page to manage accounts
  • Designate points of contact to handle registrations
  • Oversee member and/or branch information
  • Receive automatic notifications of status changes

FFIs included in the U.S.'s FATCA agreements must register, create their account, and share their information with the IRS before January 2014. The information as it stands in January 2014 will be considered final by the IRS. If an FFI needs to make a change to the information they have shared with the IRS through their account, they must do so prior to January 1st, 2014.

The IRS will begin sending registration acceptance notices and GIINs in 2014.

Penalty for Noncompliance

It is mandatory for FFIs to register with the IRS under FATCA. Noncompliance, including failure to report financial activities of American account holders, will lead U.S. Financial Institutions (USFI) and other types of U.S. withholding agents to withhold 30% of certain U.S. source payments made to these FFIs.

USFIs can also apply for FATCA registration. Those USFIs that have a network of affiliated FFIs can create an account as a Lead FI and manage the accounts of its affiliate FFIs through their account.

The IRS is providing answers to common questions regarding the reporting requirements for FFIs on their website. Although these new tax laws may seem like an additional burden, these laws will be vital in limiting a substantial amount of tax fraud, not only in the U.S., but in all countries involved in the FATCA agreement.

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