5 things you should know about FATCA

1.     What is Foreign Account Tax Compliance Act (FATCA) reporting?

Foreign Account Tax Compliance Act (FATCA) reporting is a US tax law enacted in 2010, aimed at improving tax compliance by US taxpayers with foreign financial accounts. FATCA mandates foreign financial institutions (FFIs) to report information on US account holders to the Internal Revenue Service (IRS). The law also requires US taxpayers to report certain foreign financial assets to the IRS.

2.     What information is required for reporting purposes?

Under FATCA, FFIs must identify and report information on US account holders to the IRS, including:

• Identification Information: The name, address, and taxpayer identification number (TIN) of the account holder or beneficial owner.
• Account Information: The account number, balance or value, and income or gains generated from the account.
• Entity Information: If the account holder is an entity, the name, address, and TIN of the entity, as well as information about the ownership structure and control of the entity.
• Account Holder Status: Information about whether the account holder is a U.S. person, a foreign person, or a non-U.S. entity with substantial U.S. ownership.
• U.S. Status: Indicators that suggest the account holder may be a U.S. person, such as a U.S. mailing address or phone number, a U.S. place of birth, or a power of attorney granted to a person with a U.S. address.
• Reportable Accounts: The financial institution must also report the aggregate balance or value of all reportable accounts held by a particular account holder or entity. They also need to report any accounts held by US taxpayers that exceed certain thresholds.

It is important to note that the specific information required for FATCA reporting may vary depending on the type of account, the financial institution, and the jurisdiction in which the account is held.

Data security is a critical aspect of Foreign Account Tax Compliance Act (FATCA) reporting. Financial institutions are required to collect and transmit sensitive information about their account holders to tax authorities in different countries. Therefore, they need to ensure that appropriate safeguards are in place to protect the integrity and availability of this data.

3.     What is the primary objective of Foreign Account Tax Compliance Act reporting?

The primary objective of Foreign Account Tax Compliance Act reporting is to improve tax compliance and prevent tax evasion. The law is aimed at increasing transparency and accountability in the international financial system, by providing the IRS with information on US taxpayers who hold accounts in foreign financial institutions. Reported information is used to identify and pursue individuals who could be hiding assets overseas.

4.     Who needs to be FATCA compliant?

FATCA reporting applies to foreign financial institutions in over 100 countries worldwide. FFIs that do not comply with Foreign Account Tax Compliance Act reporting requirements can be subject to a 30% withholding tax on certain US-source payments, which can have a significant impact on their business operations.

US taxpayers are also required to report certain foreign financial assets to the IRS, including foreign bank accounts, certain foreign securities, and interests in foreign entities. Failure to comply with FATCA reporting requirements can result in significant penalties for US taxpayers, including fines and potential criminal charges.

A full list of complying countries/jurisdictions can be found here on the IRS website.

5.     What is the difference between FATCA and CRS?

The Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) are two key initiatives aimed at combating tax evasion on a global scale. While both FATCA and CRS share the common goal of reducing offshore tax evasion, there are key differences between the two.

FATCA, for instance, is primarily focused on identifying tax evasion by US Persons, whereas the CRS targets offshore tax evasion based on an account holder’s country (or countries) of tax residence.

Thus, the CRS may affect a broader range of individuals and entities than FATCA, as it requires financial institutions to report information about their account holders’ tax residency to their respective tax authorities.

Both FATCA and the CRS are important tools in the fight against global tax evasion, helping to ensure that everyone pays their fair share of taxes and contribute to their respective countries’ economies.

Our Authority Suite has supported Foreign Account Tax Compliance Act reporting for many years.

See how XML Authority can help you can streamline your reporting.