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    FATCA is Coming to Your Foreign Financial Institution – Are You Ready?

    October 30, 2013, 06:49 PM

    Globalization and immigration mean increasing numbers of U.S. persons own assets outside of the United States. These assets may be business interests or other investments in foreign countries that generate interest, dividend or capital gain income; they may include bank accounts, insurance products, securities, or commercial real estate. Because U.S. citizens are subject to taxation on their worldwide income, these interests and investments, though outside the borders of the United States, may be subject to a bewildering alphabet-soup of acronyms representing reporting, withholding and payment obligations. Some highlights are that:

    • Foreign financial institutions (FFIs) will soon be required to report information on accounts held by U.S. persons and certain U.S.-owned entities to the Internal Revenue Service.
    • FATCA imposes a withholding tax on FFIs that do not have agreements with the IRS.
    • U.S. taxpayers holding financial assets outside the United States that exceed certain thresholds must report those assets to the IRS on Form 8938.
    • U.S. citizens and residents, as well as certain entities must also file Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR) if they had a financial interest in or signature authority over at least one financial account located outside of the United States in excess of the threshold amount.
    • Failure to make the necessary disclosures could result in the imposition of significant civil or even criminal penalties.

    The Foreign Account Tax Compliance Act (FATCA) was enacted in 2012 in response to concerns that U.S. owners of non-U.S. financial accounts were neither reporting the existence of those accounts nor the income earned by those accounts. FATCA seeks to require foreign financial institutions (FFIs), including non-U.S. banks, financial intermediaries, investment vehicles and certain insurance companies, to report information on accounts held by U.S. persons and certain U.S.-owned entities to the Internal Revenue Service. It accomplishes this objective by imposing a 30% withholding tax on certain payments to FFIs that do not enter into an agreement with the IRS to perform due diligence on their account holders and report certain information to the IRS, or that are not otherwise exempt from such withholding tax. This withholding is in addition to the ordinary 30% withholding tax that applies to payments of certain fixed, determinable and period income to non-U.S. persons. The additional withholding will also apply to payments to certain persons who refuse to provide information to an FFI or who refuse to waive the benefit of non-U.S. customer privacy laws that would prevent reporting to the IRS under an FFI agreement. Under FATCA, withholding agents will be required to deduct and withhold 30% from payments of income and proceeds from investments in U.S. financial assets, unless the FFI is exempt from FATCA, compliant with FATCA or is established in a country that has entered into certain intergovernmental agreements with the U.S. On January 17, 2013, the IRS and Department of the Treasury released final FATCA regulations addressing comments raised by practitioners, delaying implementation of certain aspects of FATCA expanding and harmonizing categories of FFIs that are generally exempt from FATCA, and addressing implementation of FATCA in jurisdictions that have intergovernmental agreements with the U.S. Many industries affected by FATCA are developing standards to determine how FATCA-related risks will be incorporated into business transactions, for example, by requiring covenants from non-U.S. fund managers that funds will be operated in compliance with FATCA, by allocating FATCA withholding risk between lenders and borrowers, and by imposing penalties on investors who do not provide required information. IRS Notice 2013-43, issued on July 29, 2013, revised the timelines for implementing FATCA. Among the revised timelines, withholding agents generally will be required to begin withholding on payments subject to withholding made after June 30, 2014, unless the payments can be reliably associated with documentation on which the withholding agent can rely to treat the payments as exempt from withholding. Other FATCA deadlines, including registration and the issuance of global intermediary identification numbers, have also been extended. On September 30, 2013, the IRS and Department of the Treasury issued additional amendments, correcting and clarifying the regulations pertaining to the requirement to deduct and withhold tax on withholdable payments to certain FFIs, the identification of payees, FFI agreements, payments beneficially owned by exempt beneficial owners, liability for withheld tax, withholding agent reporting, and certain definitions. Under FATCA, certain U.S. taxpayers holding financial assets outside the United States that exceed certain thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets, which must be attached to the taxpayers annual tax return. The IRS anticipates the issuance of regulations requiring a domestic entity to file Form 8938 if the entity is formed or used to hold specified foreign financial assets and the assets exceed the appropriate reporting threshold. For now, only individuals must file Form 8938. Unmarried individuals and married individuals filing separately who reside in the United States meet the reporting threshold for Form 8938 if the total value of the individuals specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. For married taxpayers residing in the U.S. and filing a joint income tax return, the reporting thresholds are $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. The thresholds for taxpayers who have either been bona fide residents of a foreign country or countries for an uninterrupted period that includes an entire tax year or who are present in a foreign country or countries at least 330 full days during any period of 12 consecutive months that ends in the tax year being reported have substantially higher thresholds. Taxpayers who are not required to file an income tax return are not required to file Form 8938, even if their foreign financial asset exceeds the applicable reporting threshold. Reportable financial accounts include savings, deposit, checking, and brokerage accounts, maintained by a foreign financial institution. Additionally, stock or securities issued by someone who is not a U.S. person, any other interest in a foreign entity, and any financial instrument or contract held for investment with an issuer or counterparty that is not a U.S. person must be reported, to the extent they are held for investment and not held in a financial account. These may include, for example, stock or securities issued by a foreign corporation; a note, bond or debenture issued by a foreign person; swaps and similar agreements with a foreign party; partnership interests in a foreign partnership; interests in foreign retirement plans or deferred compensation plans; interests in foreign estates; interests in foreign-issued insurance contracts or annuities with a cash-surrender value. Payments or the rights to receive the foreign equivalent of social security, social insurance benefits or other similar foreign governmental programs are not specified foreign financial assets and are not reportable. Additionally, foreign real estate, such as a personal residence or a rental property, is not a specified foreign financial asset. If, however, the real estate is held through a foreign entity, such as a corporation, partnership, trust or estate, then the interest in the entity is a specified foreign financial asset that must be reported if the total value of all specified foreign financial assets is greater than the taxpayers reporting threshold. In addition, U.S. citizens and residents, as well as entities such as corporations, partnerships, and limited liability companies created or organized in the U.S. or under U.S. laws, and U.S. trusts and estates, are required to file Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (also known as an FBAR) if they had a financial interest in or signature authority over at least one financial account located outside of the United States, and the aggregate value of all of their foreign financial accounts exceeded $10,000 at any time during the calendar year. A person who holds a foreign financial account may have a reporting obligation even though the account produces no taxable income. The reporting obligation may met by answering questions on a tax return about foreign accounts (for example, the questions about foreign accounts on Form 1040 Schedule B) and by filing an FBAR. Unlike Form 8938, the FBAR is a calendar year report, required under the amendments to the Bank Secrecy Act, that must be filed with the Department of Treasury on or before June 30 of the year following the calendar year reported. Effective as of July 1, 2013, FBARs must be filed electronically. The FBAR is not filed with a federal tax return. Any filing extensions of time granted by the IRS to file a tax return does not extend the time to file an FBAR; extensions of time to file an FBAR are generally unavailable. For FBAR filings by individuals with signature authority over but no financial interest in certain types of account, the Financial Crimes Enforcement Network has extended the filing deadline to June 30, 2014. For all other individuals with an FBAR filing obligation, the filing due date remains unchanged. A person required to file an FBAR who fails to file a complete and correct FBAR may be subject to a civil penalty not to exceed $10,000 per violation for violations not due to reasonable cause. Willful violations may result in higher penalties and criminal prosecution. In many cases, the potential penalties could exceed the value of the foreign account. In many circumstances, the IRS has offered people with unreported taxable income from undisclosed offshore financial accounts or other foreign assets the opportunity to resolve their tax and information reporting obligations, including FBAR violations, through a series of Offshore Voluntary Disclosure Programs (OVDPs) . In 2012, the IRS reopened the OVDP. Although the 2012 OVDP has a higher penalty rate than two previous offshore voluntary disclosure programs, it continues to offer benefits to encourage taxpayers to disclose foreign accounts rather than risk detection and possible criminal prosecution. Although the program does not have a closing date, the IRS website indicates that the IRS may end the program at a later time. Additionally, once the IRS or the Department of Justice obtains information under a John Doe summons, treaty request or other similar action that provides evidence of a taxpayer’s noncompliance with the tax laws or reporting requirements, that taxpayer becomes ineligible for OVDP. A taxpayer will also become ineligible for OVDP if the taxpayer appeals a foreign tax administrator’s decision to authorize release of account information to the IRS and fails to serve the required notice of the appeal or document relating to the appeal on the U.S. Attorney General at the time notice of appeal or other document is submitted. Finally, the IRS may announce that certain taxpayer groups that have or had accounts at specific financial institutions will be ineligible due to U.S. government actions in connection with those institutions. In a current high-profile case, Ty Warner, the Beanie Babies billionaire is expected to plead guilty on October 2, 2013, to felony tax evasion and has agreed pay a $53.5 million penalty for allegedly failing to report income he earned in a secret offshore account he held with UBS, a financial services firm based in Switzerland. In February 2009, UBS admitted that it helped taxpayers hide accounts from the IRS. As part of the agreement, UBS provided the government with the identities of and account information for certain customers. Warner had unsuccessfully sought acceptance in the 2009 OVDP. With the implementation of FATCA, U.S. taxpayers who have failed to report financial interests or signature authority in foreign financial accounts may be running out of time to participate in the OVDP. While owning accounts and other assets overseas remains legal, disclosure and income reporting of those assets must be complete and timely in order to remain on the right side of the many laws governing the overseas assets of U.S. persons. —Alison V. Lennarz