An Overview of FATCA

July 21, 2015

in Stay in Compliance

Authored by Brad Bortone

An Overview of FATCA

On March 18, 2010, the Hiring Incentives to Restore Employment (HIRE) Act of 2010 was enacted into law. The Act added a new chapter 4 (sections 1471 – 1474) to the Internal Revenue Code. Chapter 4 expands the information reporting requirements imposed on foreign financial institutions (FFIs).

These rules are commonly referred to as the Foreign Account Tax Compliance Act rules or “FATCA.” The FATCA provisions impose a 30% withholding tax on payments to a foreign financial institution (FFI) of US source interest, dividends, rents, salaries, or gross proceeds from the sale of US assets.

The tax can be avoided, but only if the FFI enters into an agreement with the IRS to comply with information reporting requirements with respect to US accounts and the FFI agrees to withhold on certain payments to non-participating FFIs and individual account holders.

More than 100 countries have signed Intergovernmental Agreements (IGAs) with the US. or have reached “agreements in substance” and are being treated by the Treasury as having an IGA in effect.

These agreements are expected to enable FATCA compliance by overcoming obstacles in local law that may prevent FFIs from entering into FATCA agreements with the IRS.

FATCA is a key component of the federal government’s push for heightened tax compliance among US taxpayers with foreign accounts. On January 17, 2013 the Department of Treasury issued final regulations under FATCA.

FATCA generally became effective on January 1, 2013, and withholding took effect for individuals on July 1, 2014. FATCA withholding began for non-compliant banks and broker-dealers in non-IGA jurisdictions starting in January 2015.

For a more detailed summary of FATCA provisions, please visit the US Internal Revenue Service FATCA description page.

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