ATCA (Foreign Account Tax Compliance Act) was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. The purpose of FATCA is to improve compliance of U.S. taxpayers who have foreign financial assets and offshore accounts.
To enforce compliance, FATCA requires foreign financial institutions (FFIs) to report directly to the IRS information about financial accounts held by U.S. taxpayers (even if they hold only non-U.S. assets), or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
FATCA is intended to increase transparency for the Internal Revenue Service (IRS) with respect to U.S. persons that may be investing and earning income through non-U.S. institutions. While the primary goal of FATCA is to gain information about U.S. persons, FATCA imposes tax withholding where the applicable documentation and reporting requirements are not met.
An FFI that refuses to disclose information to the IRS faces a 30% withholding tax on certain U.S. source payments regardless of whether the recipient is a U.S. taxpayer.
30% Withholding Tax
To enforce FFI (foreign financial institutions) to acknowledge information about the foreign account of U.S. taxpayers, FATCA will inflict a 30% withholding tax applied to payment of any source of U.S. income, gross proceeds of sales that could produce U.S. income, and pass-over payments.
There are 3 areas in order for a FFI to participate in FATCA. They come to an agreement with the IRS with requirements.
DOCUMENTATION: Obtain sufficient information on every account holder to identify U.S. accounts, and comply with verification and due diligence procedures in identifying these accounts.
REPORTING: Report annually certain information on U.S. accounts, and comply with requests by the IRS for additional information regarding these accounts.
WITHHOLDING: Deduct and withhold 30% from withhold able portion of any pass-through taxable U.S. source payment that is made to uncooperative account holder or a Non- Participating FFI.
Failure to File Form 8938
Individuals who have foreign accounts must file new Form 8938 with their annual tax return to report the ownership of specified foreign financial assets. If the total value exceeds an applicable threshold amount the penalty for failing to file a correct Form 8938 is $10,000. If the form is not filed within 90 days after notification by the IRS, an additional $10,000 penalty for each 30-day period may apply, up to a maximum of $50,000.
The Foreign Account Tax Compliance Act (FATCA) is intended to reduce the levels of tax avoidance by U.S. citizens and entities through foreign financial institutions (FFIs). The aim is to identify U.S. tax payers who hold financial assets in non-U.S. financial institutions and offshore accounts so they cannot avoid their U.S. tax obligations.
FATCA will have a significant impact on the compliance processes for thousands of organizations around the world, both financial and non-financial. It will transform the global tax framework and preparation for the new Act
Intergovernmental Agreement Model 1
The IGA provides for a partnership agreement between the U.S. and a FATCA Partnership jurisdiction, namely France, Germany, Italy and Spain with the United Kingdom first to sign the IGA agreement. Under this agreement, FFIs in partner jurisdictions will be able to report information on U.S. account holders directly to their national tax authorities, who in turn will report to the IRS. IGA highlights and benefits
- Relaxation of deadlines
- Simplified due diligence
- Increased clarity around due diligence with country specific provisions
Annex II of the Model 1 IGA includes a country-specific list of financial institutions, products and accounts that are exempt or deemed compliant, thus reducing some of the remediation work for FFIs.
- Reduced withholding requirements
- Increased clarity around insurers
- Clearer definitions with respect to pension annuities and more favorable rules applicable to new insurance contracts
Intergovernmental Agreement Model 2
The model 2 IGA reflects the framework that was described in the joint statements by U.S. and Switzerland and U.S. and Japan earlier in the year. Model 2 IGA was designed to address potential conflicts of national and local laws that would make it difficult, for Financial Institutions in some jurisdictions, to comply with FATCA. The most notable differences between Model 1 and Model 2 IGAâ€™s,
- In Model 2, financial institutions will report information directly to the IRS rather than their local jurisdictions
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