The Foreign Account Tax Compliance Act

Overview


Toni Ann Kruse and Michael D Shapiro contributed an in-depth chapter to this prestigious review, discussing the provision and impact of the The Foreign Account Tax Compliance Act (FATCA).

The Act was enacted as part of the Hiring Incentives to Restore Employment Act in 2010, and adopted with the principal purpose of preventing US persons from using foreign accounts and foreign entities to evade US tax on their assets deposited abroad. FATCA requires US payers, including US banks, brokers and companies, to withhold 30 per cent of certain ‘withholdable’ payments made to a foreign entity unless the entity qualifies for an exemption or is itself compliant with FATCA. The 30 per cent withholding rate is that which historically has been imposed on payments of interest, dividends, and other passive income by US payors to foreign persons, but until FATCA there were no withholding requirements on payments to foreign accounts of US persons.

Payments made to foreign banks, brokers, investment advisers and other foreign financial institutions (FFIs) will have withholding imposed upon the full payments made to the FFI, even if most of the payment is allocable to foreign account holders, unless the FFI itself is exempt from withholding or, if not exempt, enters into an agreement with the Internal Revenue Service (IRS) to report on all US account holders. Payments made to non-financial foreign entities (NFFEs) with US owners also are subject to FATCA, with different reporting requirements than those imposed on FFIs. Essentially, FFIs report directly to the United States Treasury or to their own government, while NFFEs report to financial institutions.

This chapter provides a general overview of FATCA as it relates to individuals and related entities (i.e., foreign trusts and foreign corporations owned by foreign trusts) that are deemed to be FFIs.