This morning I attended a breakfast meeting at the Trinidad and Tobago Chamber of Commerce on the Foreign Asset Tax Compliance Act (FATCA). For those of you who don’t know, FATCA requires foreign financial institutions (FFI) to identify any account holders who are U.S. citizens and to disclose their account information to the US Internal Revenue Service (IRS). US payers making payments to non-compliant FFIs will be required to withhold 30% of the gross payments from January 1st 2014.
Note that an FFI is any financial institution such as banks, credit unions, insurance companies, bond brokers or money managers. However, FATCA also impact any foreign entity (call Non-Financial Foreign Entities, NFFE) who is the recipient of a US sourced payment, and the NFFE will have to show its FATCA status. Withholding tax may also be imposed on those NFFE who does not provide information on each of their “substantial US owners”.
The FATCA essentially turns all FFIs into agents of the IRS, reporting the status of account owners who are US citizens. It is the Responsible Office (RO) who is required to make certifications to the IRS regarding compliance with FATCA. The IRS can terminate the FFI compliance agreements if the required certifications are not made and the FFI will be subject to the withholding tax. There are also penalties to pay for incorrect reporting for compliant FFIs.
You can find more information from the IRS Website.
Here are some other FATCA facts that you may not know.
- Increased Bank Fees – FFIs will need to re-engineer their business processes to meet the FATCA compliance. This means that much cost will be incurred initially and on and ongoing basis to meet FATCA compliance. The Banker’s Association of Trinidad and Tobago (BATT) estimates the cost to implement FATCA will be around US$100 million. This cost will be passed onto the customer, resulting in higher bank fees.
- New IT Investments – New information technology infrastructure and software processes will be required to capture the necessary information and securely transfer the information to the reporting agency or the IRS.
- New Legislation – New legislation is necessary to allow FATCA, especially in terms of privacy and transfer of financial data. Because of legal implications, the IRS entered in Inter-Governmental Agreements with countries to overcome those issues. Several countries have already signed IGAs with the IRS. You can find a list at this web page.
- Non-US Citizen Flagged as a US Citizen – The due diligence performed by FFIs look for US indicia, which includes an account holder having a US address and US telephone number. If you are like me and many of the T&T population, you have a Skybox address tied to your credit card.
- Business Impediments – Even if you or your FFI is FACTA compliant, if you are sending money to a vendor, or through an FFI, who is not FACTA compliant, then they may be faced with the withholding tax
, preventing the business transaction from proceeding. It’s quite possible that those entities may impose a 30% premium on goods or services provided. Update: Not all income is subject to the Withholding Tax. Payments that are subject to Withholding Taxes are any payment of interest, dividends, rents, royalties, salaries, wages, annuities and licensing fees if such payment is from sources within the United States, including any gross proceeds from the sale or disposition of U.S. property of a type that can produce interest or dividends. These payments also include passthru payments.
- FATCA Offers No Returns to Signing Countries – FATCA is not expected to bring any returns to non-US countries. Agreements are being signed to simply not lose money or risk being blacklisted in one way or the other.
- FATCA Offers No Returns to the US – FATCA is expected to bring the US about US$10 Billion over a 10 year period, far more than it’s going to cost the US or the rest of the world to implement and continue the FATCA process. This implies that FATCA is unfeasible, but the US is still proceeding with it; I believe that there is more in the mortar than the pestle.
- There is a Lot of Opposition to FATCA – Just Google “FATCA illegal”, or check out the website Repeal FATCA.
Personally, I believe that FATCA should strongly opposed by everyone. I simply cannot understand how FATCA could be legal by international standards.
What is your take on FATCA? Give your comments below.