What is FATCA?

Seeking to address perceived abuses by U.S. persons with offshore assets, the U.S. Congress enacted the Foreign Account Tax Compliance Act (“FATCA”) in 2010 to assist the IRS in identifying offshore income held by U.S. persons. FATCA identifies offshore income by compelling non-U.S. entities to report the identities of U.S. accountholders to the IRS, using a new U.S.-sourced withholding tax levied against non-cooperative foreign entities to enforce compliance. Similarly, FATCA requires U.S. persons to specifically identify substantial foreign assets (and income related to such assets) beginning on their U.S. tax returns filed in 2012. Comparing the information it obtains from compliant foreign entities with the new U.S. tax return information, the IRS believes it will quickly be able to identify sources of unreported foreign income and discourage tax evasion.

FATCA’s mechanism for compelling compliance, a new 30% withholding tax on U.S. source income, will have a significant impact on all U.S. and foreign financial institutions and it will likely encourage foreign financial institutions (FFIs), as well as other affected foreign entities, to share information with the IRS for the first time. The withholding tax will be imposed in a similar manner to the existing withholding tax on U.S. source income under Chapter 3 of the Internal Revenue Code by requiring payors (or withholding agents) of U.S. sourced income and gross proceeds to withhold 30% on payments to non-U.S. entities that do not certify their compliance with FATCA. To avoid the tax, FFIs must enter into formalized agreements with the IRS to share the identities of U.S. account and asset holders. Other affected non-U.S./non-FFI entities seeking to avoid the tax will be required to provide information to the withholding agents relating to any of their U.S. owners.

In proposed regulations released in February 2012, the U.S. Treasury and IRS have provided detailed requirements that FFIs, U.S. withholding agents, and other non-U.S. entities must comply with to avoid the withholding liability under FATCA. The proposed regulations also detail exceptions and exclusions to the withholding and suggest a broader framework of international cooperation seeking to ease challenges of FATCA compliance on foreign entities. If affected by FATCA, you should understand the implications of these rules, exceptions, and frameworks on your industry and business and prepare to address them. The proposed regulations have eased some of FATCA’s compliance deadlines, but some hurdles (and opportunities) still exist to prepare your processes, systems, and business relationships now for a smooth transition to the new, more transparent international business environment that FATCA attempts to create.

Industry Impacts

FATCA requires U.S. banks to enhance the information they collect about non-financial foreign entity (NFFE) account holders as well as foreign financial institutions (FFIs) with which they do business. For individual accounts opened after January 1, 2014, banks may not rely on a Form W-8 as proof of foreign status if contradictory information (i.e. U.S. birthplace) exists in know your customer (KYC) systems. For accounts opened before January 1, 2014, banks are not required to electronically search existing KYC systems for a U.S. birthplace, but must monitor for it as new information is received.

Any new or pre-existing account holder that fails to provide satisfactory information (“recalcitrant” account holder) is subject to 30% tax withholding on payments of U.S. source fixed, determinable, annual or periodic (FDAP) income and gross proceeds. If an FFI does not sign a FATCA agreement or fails to fulfill its obligations, the U.S. bank must withhold a 30% tax on payments of FDAP income and gross proceeds payable to the FFI or its clients. Certain grandfathered obligations are excluded and withholding under FATCA replaces withholding that would have occurred under other tax regimes to the extent double withholding would otherwise apply.

In most cases, FFIs that sign a FATCA agreement (Participating FFI or “PFFIs”) will be required to push down their own withholding responsibilities to the U.S. bank. In these cases, the U.S. bank will receive a copy of the PFFI agreement and a withholding statement which details the amounts to be withheld. Absent these documents, the U.S. bank will be obliged to withhold 30% on the full amount of the withholdable payment.

Application/Next Steps:

• Impact assessment: Identify the business units, operational areas, IT systems and legal documents (e.g. account opening agreements) impacted by FATCA. Operational areas that would be impacted include client onboarding, payment processing, tax withholding and depositing, and regulatory reporting.
• Client classification: Classify accounts and other impacted relationships (e.g. counterparties for derivatives contracts) per FATCA rules to identify those needing special treatment.
• Implementation planning: Make business decisions that would reduce the ongoing and implementation costs for FATCA compliance. Leverage and modify existing processes and systems to further reduce implementation costs and business disruption.
• Communication: Communicate with internal and external stakeholders
• Governance: Update policies and procedures, legal documents.

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As used in this document, “Deloitte” means Deloitte Tax LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

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