What is The Foreign Account Tax Compliance Act (FATCA)?
FATCA, which is US legislation, is
the latest in a number of measures being introduced around the
world taking a more draconian view on matters of tax compliance and
FATCA is extremely wide reaching and
is designed to ensure that the US Internal Revenue Service (IRS) is
able to catch all overseas income and gains that should be liable
to US taxation.
What does FATCA do?
At this stage, the US authorities
have only issued guidelines but it is expected that these will
remain largely unchanged.
Under the guidelines, all payments
of US source income and capital to Foreign Financial Institutions
(FFIs) and Non Financial Foreign Entities (NFFE) will be subject to
a withholding tax (WHT) penalty of 30 per cent unless the
institution or entity concerned has entered into an agreement with
The agreement will require the
qualifying entity to provide certain information on US account
holders and their transactions as well as committing to applying
the withholding tax to any transfers on to non-compliant FFIs.
Who qualifies as an FFI or NFFE?
The envisaged terms of FATCA are designed to cover all
institutions that accept deposits or hold assets for the account
of, or trade on behalf of, US investors using US source income.
In light of this, FATCA covers all
banks, funds, trusts and other investment vehicles and so will have
an effect on all levels of the financial services industry.
When will this take affect?
The timeline for implementation is
designed so that all FFIs who wish to avoid the WHT deductions have
to submit their agreement applications to the IRS by 30 June 2013
as the tax deductions are due to commence from 1 January 2014.
What should individual service providers do?
The impact on institutions
administering or managing vehicles or accounts that fall under the
terms of FATCA will be the level and detail of analysis and due
diligence needed to identify US tax payers whatever route they may
use to introduce capital into that vehicle.
This will require enhanced KYC and
client review procedures to ensure that the demands for information
by the IRS can be met to their satisfaction.
Despite the fact that the deadline
for implementation is still some time off, it is imperative that
all entities which may be affected by FATCA begin to consider
whether they fall under the definition of an FFI or NFFE, whether
they have exposure to US sourced income and, if necessary, review
their procedures to ensure that they are able to meet the demands
of compliance with the reporting requirements of the IRS.
Moore Stephens Jersey is already
addressing this and can provide assistance to anyone who feels that
they may be affected by FATCA.
Previously published March 2012
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