he Foreign Account Tax Compliance Act (FATCA) has not only made it more difficult for U.S. taxpayers to comply with the complicated reporting requirements for offshore accounts. It has also created burdensome new obligations for foreign financial institutions (FFIs) that serve U.S. taxpayers.
As we noted last week, the U.S. Treasury has had remarkable success in negotiating inter-governmental agreements (IGAs) with foreign governments for sharing taxpayer data. In this part of the post, we will discuss how taxpayers are affected by the FATCA requirement that FFIs register with the IRS and agree to report certain information about their account holders, a withholding tax of 30 percent on certain payments they receive from U.S. sources.
We are using the term “FFIs” rather than banks because the IRS definition of FFI extends broadly to numerous entities besides banks. This includes investment entities (such as hedge funds) and even some insurance companies if they handle certain products (such as annuities).
And then there is withholding – perhaps the biggest of the enforcement sticks intended to make FFIs comply with FATCA. If an FFI doesn’t register with the IRS and agree to report information on account holders who are U.S. taxpayers, the IRS can seek to impose a withholding tax of 30 percent on certain payments they receive from U.S. sources.
Even if FFIs do register with the IRS and report on their account holders, FATCA may also require them to withhold 30 percent on various payments if the payment recipients have not fulfilled their FATCA obligations.
In other words, if you are a U.S. taxpayer and your foreign bank believes you have not disclosed your offshore accounts, the bank may have to withhold 30 percent of your interest payment.
As noted recently in a Forbes piece on FATCA compliance in Asia, FFIs that do not withhold properly can be held liable for the full amount that they did not withhold. In such a scenario, interest and penalties would be assessed as well.
In short, FATCA puts intense pressure on FFIs to cooperate with the IRS. That is why, as a taxpayer facing offshore account decisions, it is more important than ever to get your own counsel from an experienced tax lawyer.
Source: IRS.gov, “FATCA Information for Foreign Financial Institutions and Entities”