The Foreign Account Tax Compliance Act (FATCA)
Was signed into law in 2010 and codified in Sections 1471 through 1474 of the Internal Revenue Code. The law was enacted in order to reduce offshore tax evasion by US persons with undisclosed offshore accounts. There are two parts to FATCA – U S taxpayer reporting of foreign assets and income on Form 8938 and reporting by a Foreign Financial Institution or FFI of foreign bank and financial accounts to the IRS. It is the latter that is resulting in FFI’s sending out that dreaded letter to suspected US account holders requesting US taxpayer identification and information referred hereafter as the FATCA letter.
FATCA generally requires an FFI to identify certain US accountholders and report their accounts to the IRS. Such reporting is done either through an FFI Agreement directly to the IRS or through a set of local laws that implement FATCA. If an FFI refuses to do so or otherwise does not satisfy these requirements (and is not otherwise exempt), US source payments made to the FFI may be subject to withholding under FATCA at a rate of 30%. Note that FATCA information reporting and withholding requirements generally do not apply to FFI’s that are treated as deemed-compliant because they present a relatively low risk of being used for tax evasion or are otherwise exempt from FATCA withholding.