By Gina Gatchell, Director
In 2010 I received a call from a very upset US citizen about the enactment of the Foreign Account Tax Compliance Act.
She sent me the article she had just read, which set out the future of information reporting by institutions outside the United States to the US government.
Purpose
The multi-faceted Foreign Account Tax Compliance Act (FATCA) was passed in 2010 as part of the Hiring Incentives to Restore Employment Act (HIRE). The aim of FATCA is to identify offshore tax evasion of citizens and residents of the United States. This is done by leveraging foreign financial institutions to hand over the details of their US account holders with a balance of US$50,000 or more in the aggregate.
FATCA also affects certain foreign entities with substantial United States ownership.
Implementation
Foreign Financial Institutions (FFIs) and US persons alike, naturally did not take this new heat from the United States government sitting down.
Many years of implementation and privacy-related issues ensued, with FFIs forced into satisfying IRS requirements enabling the FFI to be identified by the IRS as a ‘participating FFI’. The significance of which is that the FFI escapes a 30% withholding tax on payments due to the institution.
To satisfy IRS requirements, in the pre-intergovernmental agreement era of FATCA, the FFI was required to enter into an agreement with the IRS to do the following:
(1) conduct certain identification and due diligence procedures with respect to the institution’s
accountholders;
(2) report annually to the IRS on its account holders who are United States persons or foreign entities with
substantial United States ownership; and
(3) withhold and pay over to the IRS 30% of any payments of United States source income, as well as gross
proceeds from the sale of securities that generate United States source income, made to –
(a) non-participating FFIs, (b) individual accountholders failing to provide sufficient information to
determine whether or not they are a United States person, or (c) foreign entity accountholders failing to provide sufficient information about the identity of its substantial United States owners.
Failure to be recognized by the IRS as a ‘participating FFI’ will result in a 30% withholding tax being imposed on United States sourced income derived by the FFI, from January 1, 2014 on interest and dividends, followed by an across-the-board 30% withholding on all ‘withholdable payments’ from January 1, 2015.
US Treasury released several rounds of Treasury Regulations pertaining to the reporting and withholding requirements for FFIs.
There are many elements to FATCA
- Form W-8BEN[1]: Certificate of Foreign Status of Beneficial Owner for United States Withholding
and Reporting.
The original form has been duplicated; previously one Form W-8BEN existed, now there is an additional form modelled off the original form for non-individuals including companies. The original purpose of Form W-8BEN was for Chapter Three Withholding purposes. Post FATCA implementation, Form W-8BEN was split into Form W-8BEN-E for entities covering both Chapter Three and Chapter Four (FATCA) identification to the United States payer of income to that entity.
- Form 8938 is required to be filed by US persons holding specified foreign financial assets.[2]
- Foreign financial institutions have a number of obligations imposed on them by FATCA including:
- Unless the FFI resides in a country with which the United States has entered into an Intergovernmental Agreement the FFI is required to register with the IRS, including obtaining a Global Intermediary Identification Number.
- The requirement to search their electronic databases for indicia of US persons being account holders. Depending on the balance of accounts falling under or over $50,000, further inquiries had to be made to confirm whether the account holder was a US person or not.
Outcomes
As a result of the above, foreign financial institutions had to make massive changes to identify their US account holders so that they wouldn’t be penalized.
FFIs, including the New Zealand banks and other financial institutions continue to write letters to account
holders requiring them to provide certification of their US status.
- The International Data Exchange Services (IDES) – the secure managed file transfer service that is available to financial institutions to facilitate FATCA reporting.
- The Intergovernmental Agreement (IGA) – New Zealand has negotiated a Model 1 IGA with the United States, under which its financial institutions report to New Zealand’s Inland Revenue instead of directly
via IDES. Inland Revenue then transmits data to via IDES to the United States.
- Host country Tax Authorities (HCTAs) – The HCTA for New Zealand, IRD’s role in FATCA includes;
- Facilitating the Intergovernmental Agreement in place with the United States.
- Data transmission through IDES to the United States.
- Provision of technical guidance to New Zealand’s financial institutions around their FATCA obligations.
- United States Internal Revenue Service – assimilates the data received from around the world through IDES.
If you need expert advice to meet your US tax obligations under FATCA we can help. Call us on +64 27 512 0365 or use the appointment scheduler to book a telephone consultation or make an appointment.
[1]
The purpose of form W-8BEN is to certify to a US payer of income whether or not
US federal withholding tax is required to be withheld from payments to a non-US
entity.
[2] The requirement to file Form 8938 depends the filing status of the US person and the amount of specified foreign financial assets held including the highest balance at any time during the US tax year, and the balance on 31 December. The form was introduced as a ‘FATCA form’ in 2012.
