The United Sates’ Foreign Account Tax Compliance Act (FATCA) was written into law in March 2010 and became operative on 1 July 2014. The objective of the legislation was to ensure that United States taxpayers with foreign bank accounts and certain types of offshore (that is non-US) assets complied with American tax conventions. How this was to be achieved was to require foreign (i.e. non-US) financial institutions to report directly to the IRS on US taxpayers who hold accounts with such institutions. A withholding penalty was to be imposed on the foreign financial institution for not reporting.
Throughout the world, tax systems are usually based on the place of residence of the taxpayer. The United States’ system is different – the basis for individual taxation is based on citizenship. This results in the US IRS chasing its national irrespective of where they live for a slice of their worldwide earnings. Most US taxpayers may end up owing nothing as they get a credit for what they pay to foreign tax collectors. However there is a hassle factor in having to do the paperwork (or paying someone to do it). What FATCA has done is to introduce new reporting requirements on banks anywhere in the world that serve Americans.
The legal niceties of financial institutions being empowered in their home jurisdictions to provide this information has been neatly tied up in a series of inter-governmental agreements. In most cases (countries) banks report to their local tax authorities. This however is not the subject of this article. What we really need to clearly understand are six basic concepts that govern the FATCA regimen. These concepts are core issues and are the starting point in maintaining a suitably compliant account opening process.
Each of these concepts can be phrased in the form of a question.
1. What is a Foreign Financial Institution? A Foreign Financial Institution (FFI) is any non-US entity that:
a. Accepts deposits in the ordinary course of a banking or similar business,
b. Holds as a substantial portion of its financial assets for the account of others,
c. Is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, notional principal contracts, insurance or annuity contracts, or any interest in any of the above, or
d. Is an insurance company (or the holding company of an insurance company) that issues or is obligated to make payments with respect to a financial account.
2. What are Financial Accounts?
A Financial account is;
a. Any depository account (holding a monetary balance) maintained by the financial institution,
b. Any custodial account (holding a stock balance) maintained by the financial institution,
c. Any equity or debt interest in a financial institution that is an investment fund (other than those that are regularly traded on an established securities market), and
d. Any cash value insurance contract and any annuity contract issued or maintained by the financial institution.
3. What is a United States account?
This is a financial account held by a specified United States person or a United States owned foreign entity.
4. What is a United States owned foreign entity?
Any non-financial foreign entity (NFFE) with one or more substantial United States owner or owners. A “substantial” owners is defined as a specified United States person who owns more than 10% of the stock of a corporation or its capital or profits in the case of a partnership.
5. Who is a specified United States person?
Any United States person other than;
a. A publicly traded corporation,
b. The affiliates of a publicly traded corporation,c. A specifically exempted organization,d. The United States,
e. A US State, the District of Columbia (DC) , or a United States possession,
f. Any bank defined in section 581 of the United States Code (“United States Code” is a consolidation and codification by subject matter of the general and permanent laws of the United States),
g. A “REIT” (real estate investment trust),
h. A “RIC” (regulated investment company) or SEC registered company under Investment Company Act of 1940,
i. A common trust fund,
j. An exempt trust under section 664(c), (United States Code),
k. A dealer registered under the laws of the United States or a US state, and
l. A broker as defined in 6045(c) (United States Code).
The above list is of course the exemptions to being classified as a United States person. So if you’re legal status is not listed and you are a US citizen or resident you ARE a specified United States person.
6. What are the United States Indicia?
Indicia refers to the signs, indications, or distinguishing marks that will give clues as to whether an account owner is a United States person and has to be reported on under FATCA. For all FFI account holders the indicia of U.S. status is if she or he;
a. Is a United States citizen or resident,
b. Was born in the United States,
c. Has a United States residence or mailing address,
d. Has a United States telephone number,
e. Has provided standing instructions to transfer funds to a United States based account,
f. Has granted power of attorney over the account to a person with a United States address,
g. Has a “care of” or hold mail address that is the sole address of account holder.
Positive indicia other than (a) - a United States citizen or resident, and (b) – evidence of birth in the United States, does not automatically include the account holder in the status of a United States person. Further investigation is required.
The above six concepts form the basis and starting point for the due diligence process in all Foreign Financial Institutions and a critical part of the new account opening process (onboarding).