The Foreign Account Tax Compliance Act is part of the provisions in the Hiring Incentives to Restore Employment Act (HIRE), signed into law in March 2010 and scheduled took effect on January 1, 2013. FATCA creates new information reporting and withholding regimes for payments made to certain foreign financial institutions and other foreign entities.
FATCA is intended to increase transparency for the IRS with respect to US person who invest and earn income through non US institutions. FATCA imposes a 30% withholding tax where the applicable documentation and reporting requirements are not met. The regime thus addresses perceived tax abuse by US persons through the use of offshore accounts.
FATCA withholding, began for fixed or determinable annual or periodical payments (FDAP) made, from January 1, 2014 onwards.
FATCA can impact any person, US or Foreign, who is involved in making or receiving payments of US income source. This also applies to virtually all non-US entities, directly or indirectly, receiving gross proceeds which produce interest or dividends.
Moreover, US entities that make payments of US source to non-US persons, will also be subject to the 30% withholding tax under FATCA. US entities are therefore obliged by law to maintain documentation of non-US persons.
FATCA generally applies to two defined payment types
A US source payment is any income that arises within the US. The source of certain income, such as dividends and interest, is based on the residence of the payer, whilst the source of income from property is based on where the property is used.
Under FATCA, one is therefore required to report all world-wide income and proceeds received by US persons.
No, FATCA does not replace the existing US 30% withholding tax and reporting regimes.
An FFI is a foreign financial institution. That is, any non US entity that
Generally-speaking, a non US entity may be a bank, broker or dealer, insurance companies, hedge funds and private equity funds.
In order to comply with FATCA, an FFI will enter into an FFI Agreement with the US Treasury in order to determine which accounts are US accounts and conducts annual reporting of those accounts .
An FFI that enters into an FFI Agreement by June 30, 2013 will be identified as a participating FFT and this avoid FATCA withholding that will begin January 1, 2014.
As a US citizens or non US citizens involved with a US entity must seek professional financial advice ahead of FATCA that is scheduled to come into law in January 2013. A deVere Financial Adviser can advice a US client on their national or international investments and will then refer them to a US Tax attorney to make sure that their tax position is 100% compliant.
The United States has tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income. Under these same treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. Most income tax treaties contain what is known as a "saving clause" which prevents a citizen or resident of the United States from using the provisions of a tax treaty in order to avoid taxation of U.S. source income.
If the treaty does not cover a particular kind of income, or if there is no treaty between your country and the United States, you must pay tax on the income in the same way and at the same rates shown in the instructions for the applicable U.S. tax return.
Many of the individual states of the United States tax income which is sourced in their states. Therefore, you should consult the tax authorities of the state from which you derive income to find out whether any state tax applies to any of your income. Some states of the United States do not honour the provisions of tax treaties.
US status is determined if there exists:
NB. Having one of these indicia does not necessarily mean that the account is owned by a US person but must be given closer scrutiny.
Transferring money from someone in the US to someone in a foreign country will not trigger FATCA withholding. Nonetheless, money transfer into and income earned in a US account may be subject to FATCA reporting requirements.
A joint account that has one US owner is treated as a US account and the entire account is subject to reporting as US person.