Finesse FATCA Solutions

FATCA – Foreign Account Tax Compliance Act Solutions

What is FATCA?

FATCA (Foreign Account Tax Compliance Act), is a new legislation from the US government signed in to law on 18 March 2010, was enacted to prevent offshore tax abuses by U.S. persons (citizens and tax-payers). It includes a 30% withholding tax on certain foreign entities that refuse to disclose the identities of these U.S. persons. Foreign Financial Institutions – FFIs (i.e FIs outside US) were required to comply with FATCA by January 2013 and start periodic reporting of US accounts and undertake withholding on eligible payments to non-FATCA compliant banks and customers.


Is FATCA Necessary?

The Foreign Account Tax Compliance Act (“FATCA”) is US legislation that was signed into law on the 18th March 2010 and entered into force in January 1st, 2013.

• It is aimed at combating tax evasion by US citizens using foreign bank accounts or legal entities to hide income derived from US sources.

• FATCA requires all financial sector companies (banks, insurance companies, investment companies, agencies and securities firms, etc.) to provide information on the paymentscarried out to individuals or legal persons through accounts (or contracts, for example insurance policies).

• From January 1st, 2014 all financial   institutions should be able to classify all new accounts. Ultimately, all their clients (individuals and legal entities) will need to be classified for FATCA purposes.

FATCA Purpose?

The overall purpose is to detect, deter and discourage offshore tax abuses through increased transparency, enhanced reporting and strong sanctions. The ultimate goal of the legislation is for the United States to obtain information with respect to offshore accounts and investments beneficially owned by US taxpayers rather than to collect any tax through the new withholding regime.

FATCA is not just a challenge, It is an opportunity: to improve customer data quality & availability to open a new dialog with customers, to transform compliance in this area. FACTA will have major implications for customer data quality and availability. Finesse has already completed the process of analyzing how its solutions can be architected to support the various components that make up the FATCA legislation and is building solutions to help firms comply in 2013.

FATCA Provisions?

It requires foreign financial institutions, such as banks, to enter into an agreement with the IRS to identify their U.S. account holders and to disclose the account holders’ names, TINs, addresses, and the accounts’ balances, receipts, and withdrawals. U.S. payers making payments to non-compliant foreign financial institutions are required to withhold 30% of the gross payments. Foreign financial institutions which are themselves the beneficial owners of such payments are not permitted a credit or refund on withheld taxes absent a treaty override.

U.S. persons owning these foreign accounts or other specified financial assets must report them on a new Form 8938 which is filed with the person’s U.S. tax returns if they are generally worth more than US $ 50,000; a higher reporting threshold applies to overseas residents and others. Account holders would be subject to a 40% penalty on understatements of income in an undisclosed foreign financial asset. Understatements of greater than 25% of gross income are subject to an extended statute of limitations period of 6 years.

It closes a tax loophole that foreign investors had used to avoid paying taxes on U.S. dividends by converting them into “dividend equivalents” through the use of swap contracts.