Foreign Account Tax Compliance Act

Foreign Account Tax Compliance Act (FATCA)

FATCA (Foreign Account Tax Compliance Act) was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act and takes effect on July 1, 2014. The purpose of FATCA is to improve compliance of U.S. taxpayers who have foreign financial assets and offshore accounts.

To enforce compliance, FATCA requires foreign financial institutions (FFIs) to report directly to the IRS information about financial accounts held by U.S. taxpayers (even if they hold only non-U.S. assets), or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

An FFI that refuses to disclose information to the IRS faces a 30% withholding tax on certain U.S. source payments regardless of whether the recipient is a U.S. taxpayer.

FATCA stands for The Foreign Account Tax Compliance Act (FATCA) which was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act on March 18, 2010. FATCA creates a new information reporting and withholding regime for payments made to certain foreign financial institutions and other foreign entities. The FATCA rules generally become effective with respect to certain payments made on or after January 1, 2014.

FATCA is intended to increase transparency for the Internal Revenue Service (IRS) with respect to U.S. persons that may be investing and earning income through non-U.S. institutions. While the primary goal of FATCA is to gain information about U.S. persons, FATCA imposes tax withholding where the applicable documentation and reporting requirements are not met.

In general, a withholding agent is required to withhold 30% on a withholdable payment made to a Foreign Financial Institution (FFI) or to a Non-Financial Foreign Entity (NFFE), unless the FFI or NFFE meets certain requirements. In addition, an FFI must withhold 30% on any pass-through payment it makes to a recalcitrant account holder, as well as to payments it makes to another FFI unless that FFI meets certain requirements.