Key facts about FATCA

The following is a brief summary guide to the complex and far-reaching Foreign Account Tax Compliance Act (FATCA), now being enforced by the US government. The brief was compiled by Graham Thomson, FATCA Lead UK, BDO Financial Services (pictured)

WHAT IS FATCA?

The Foreign Account Tax Compliance Act (FATCA) is a new US law aimed at foreign financial institutions (FFIs) and other financial intermediaries to prevent tax evasion by US citizens and residents through the use of offshore accounts. The FATCA provisions were included in the HIRE ACT which was signed into US law on 18 March 2010.

WHAT ARE THE FEATURES AND OBJECTIVES?

The Act seeks to improve the tax compliance of specified US persons with offshore financial accounts. It applies to client accounts with an aggregated annual value of above $50,000. However, there are additional requirements on accounts valued at over $500,000. It is projected to raise $7.6bn in tax revenue for the US over a 10 year period.

WHO DOES IT APPLY TO?

The rules will apply to any foreign financial entity which:
– Accepts deposits in the ordinary course of business
– Holds financial assets for others (e.g. custody/ nominee services)
– Is primarily engaged in investing, reinvesting or trading in inter alia securities or commodities

In practice this means that a wide range of financial institutions will potentially fall under the remit of FATCA including Banks (Retail & Private), Investment Funds, Insurance Companies, Pension Funds, Mutual funds, Broker Dealers and Private Equity firms. The requirements for Private Banks are more onerous than for Retail Banks. They must conduct due diligence reviews on clients with >$500k whereas for Retail Banking they are limited to electronically searchable data.

WHAT ARE THE TIMELINES FOR IMPLEMENTATION?

Final Regulations on FATCA from the US Treasury will not be communicated until the end of December 2011 and a great deal of lobbying is still going on to address a multitude of industry concerns. As it stands, this regime comes into effect on 1 January 2013, although the most significant provisions (e.g. 30% withholding tax) are effective from 1 Jan 2014. Firms that chose to enter into agreements with the IRS will have to do so before 1 July 2013.

WHAT ARE THE IMPLICATIONS FOR FINANCIAL SERVICES FIRMS?

Financial Services firms will need to determine if they wish to continue to do business with US customers and whether they wish to continue to trade in US assets. If they do wish to continue they will have to enter into an agreement with the IRS (Internal Revenue Service) before the end of June 2013 and comply with certain reporting requirements.

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