FATCA: Reducing the tax village
TAX in the 21st Century is exciting and new ideas and theorems are emerging to increasingly reduce the global village into one block where information is shared and taxes are realised even from abroad. Mid last year in June, a new notion was coined in the tax world.
This new coined word is “FATCA” which is Foreign Account Tax Compliance Act. Generally, it is a law that deals with foreign accounts and tax compliance of United States citizens. Enacted in 2010 and operationalized in June 2014, FATCA seeks to prevent tax abuses by US persons living or operating outside of the US. Prior to FATCA, one would easily repatriate income from the US and hide it in other jurisdictions and never face the taxman in the USA.
With FATCA, one has to report payments of US sourced income which includes dividends, interest and insurance premiums.
FATCA therefore creates greater transparency by strengthening information reporting and compliance by providing rules around the processes of documenting, reporting and withholding on a payee.
U.S. individual taxpayers must report information about certain foreign financial accounts and offshore assets on Form 8938 and attach it to their income tax return, if the total asset value exceeds the appropriate reporting threshold.
To avoid being withheld upon, a foreign financial institution may register with the IRS, obtain a Global Intermediary Identification Number (GIIN) and report certain information on U.S. accounts to the IRS.
FATCA was adopted by the U.S. congress as part of the HIRE Act and after a number of revisions, finally entered into force on 17 January 2013. FATCA aims primarily at preventing tax evasion by U.S. persons. Under FATCA, Foreign Financial Institutions (FFIs) had to conclude an agreement with the Internal Revenue Service (IRS) by 30 June 2014 at the latest and thus were obliged to regularly report extensively on US persons.
If such institutions do not meet the reporting obligations, they will become subject to a 30% withholding tax on payments of US source income made to non-US financial institutions, unless they enter into an agreement with the US Internal Revenue Service (IRS) and agree to disclose information about their US account holders. Reporting Financial Institutions are obliged to commence reporting under FATCA from 01 July 2014.
The interesting twist is that the U.S. Supreme Court ruled in a manner consistent with U.S. Constitution, Amendment 14, which says:
“All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States, and of the State wherein they reside.
” This means that even though one ordinarily is resident in other states, as long as they were born in the United States or naturalized there, the FACTA law applies to them. Some of the banks in Uganda have taken the step to apply these FACTA regulations to their clients and at times, many of the customs although local customers are made to fill out a FATCA form as a precautionary measure, allowing the Bank to disclose to the United States Inland Revenue Service certain information.
FATCA affects financial institutions and insurance companies. Under FATCA, ‘Reporting Financial Institutions’ are custodial institutions that hold financial assets for the account of others including depository institutions such as banks, investment entities, and insurance companies;
FATCA has a significant impact on the business activities and business models of financial institutions. FFIs are now required to prepare solutions to meet the FATCA obligations. FFIs should also be ready to meet other local and international regulatory requirements while safeguarding banking secrecy.
Such solutions will directly influence the cost and income structures of FFIs. For this reason, organizations should also determine other required changes to the business and operations models beyond arising compliance questions.
The ability to align all key stakeholders, including operations, technology, risk, legal, and tax, are critical to successfully comply with FATCA. Both financial institutions and nonfinancial Multi-National Corporations should consider steps, which include analyzing legal entity structures and performing due diligences for already existing clients. How ready and compliant is your Financial Institution?
