What is Tax?
An involuntary fee levied on corporations or individuals that is enforced by a level of government in order to finance government activities.
In the investing world, one of the most important types of taxes, and therefore one of the most highly debated type of tax is capital gains tax. Capital gains tax represents the tax paid on the increase in value made on an investment.
What is FATCA?
The Foreign Account Tax Compliance Act (FATCA) is legislation enacted in March 2010 by the US Government, implemented on 1st January 2013.
The purpose of FATCA is to stop American citizens from evading US tax by using foreign subsidiaries to invest in the US through foreign accounts. FATCA imposes a 30% withholding tax on foreign entities that refuse to disclose the identities of their US clients.
Payments subject to a 30% withholding tax include payments sources from the US such as interest, dividends, rents, salaries, premiums, annuities and any other gross proceeds which could produce interest or dividends from sources within the US.
Foreign banks and other financial institutions, including foreign insurance companies, must therefore provide the evidence to verify US status within a time limit. Failure to provide evidence within the agreed timescale, or if the individual fails to disclose assets in full in their annual tax returns to the IRS, the foreign financial institution must treat their account as a recalcitrant account and must withhold all US source income and payments from them and will also be subject to 30% withholding tax.
What happens if a FFI does not comply with FATCA?
Any foreign financial institution that does not comply with the IRS will be listed as a Non-Participating FFI and any US-source payments to these institutions will also be subject to 30% withholding tax that is deducted directly from the IRS.
What does an FFI have to do?
An FFI may enter into an agreement with the US revenue authorities requiring it to report all US citizens’ accounts. They must be able to capture the status of an individual, have systems to withhold tax and to report it. Certain countries like the UK, Italy, Spain and France are currently negotiating an agreement with the US government to facilitate the exchange of information.
All FFIs must start registering and sign up to FATCA by June 30, 2013. The withholding tax will be phased in over a number of years commencing with US source income payments in January 2014.
What does a client have to do?
FATCA requires certain US taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report these assets using the new IRS form 8938 and this must be attached to the tax payer’s annual tax return.
For most tax payers this will be for the tax year 2011, which will be filed in 2012. Failure to report a form 8938 will result in a penalty of $10,000 and $50,000 for continued failure, plus up to 40% penalty for non-reporting of foreign assets.
Does FATCA only apply to banks?
No, the rules also apply to foreign financial institutions as well as non-financial foreign entities, therefore foreign insurance companies as well.