“What Is” The Foreign Account Tax Compliance Act (FATCA)?

The Foreign Account Tax Compliance Act (FATCA) is a regulation enacted by the U.S. federal government to stem tax evasion by US citizens and residents using offshore accounts. Under FATCA, the government will obtain information to foster more transparency into offshore accounts. FATCA is projected to raise $7.6 billion in revenues over the next decade.

FATCA was first introduced in October 2009 but was officially established as part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010, which requires financial institutions to identify US citizens with offshore accounts.

FATCA, which takes effect Jan. 1, 2013, will require taxpayers with foreign financial assets to report these assets to the Internal Revenue Service (IRS).

In addition, participating foreign financial institutions (FFIs) must meet basic requirements and enter into an agreement with the IRS covering documentation, withholding 30% of U.S. source payments, and annual reporting upon US accounts. FFIs with assets with an aggregate value exceeding $50,000 must submit a separate form (Form 8938), which is to be included in tax returns. Meeting these requirements is likely to be expensive.

FFIs are also required to report information to the IRS regarding accounts held by U.S. taxpayers or by foreign entities where a US citizen holds significant ownership. FFIs were required to enter an agreement with the IRS by June 30, 2012 in order to comply with these new regulations. If the FFI does not meet these requirements, an agent must withhold 30% of the payment made to an FFI or to a non-financial foreign entity (NFFE).

One of the penalties for not disclosing FATCA information to the IRS includes a 30% withholding tax on U.S. source payments. Violators could also face a $10,000 fine for not filing a correct Form 8938 or for failing to file within 90 days after being notified by the IRS. There may be an extra $10,000 fine for every additional month of delay for a maximum penalty of $50,000.

FATCA is also significant in terms of corporate action processing, particularly in terms of system changes that must comply with FATCA guidelines.

Corporate actions are steps taken by a publicly traded company that usually sets off a process that impacts the shareholders of a stock. Generally, corporate actions provide investors with more transparency into a public company’s financial state by letting investors observe how each action influences the price of a stock.

FATCA will increase the complexity of corporate actions processing, specifically in terms of information management analysis, assessments and controls.

For instance, under FACTA FFIs face the challenge of dealing with the inconsistency and quality control issues of corporate actions data across the globe. Lastly, the IRS now requires firms to use new cost-basis reporting (CBR) methods when calculating the impacts of corporate actions on equity assets.

Many critics of FATCA have expressed concerns over privacy particularly for citizens with dual citizenship. Others have also questioned the ultimate effectiveness of this reform.

This entry was posted in Compliance, Corporate Actions, Regulation, What is series and tagged , , . Bookmark the permalink.

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