• Overview of FATCA and CRS

What is FATCA?

The United States (U.S.) Government’s Foreign Account Tax Compliance Act (FATCA) was signed into law on March 18, 2010 as s501 (a) of the Hiring Incentives to Restore Employment (HIRE) Act. The stated objective was to “increase tax receipts to the U.S. Internal Revenue Service (IRS) by identifying offshore accounts that could potentially be used for tax evasion purposes”.

FATCA creates a global tax information exchange network relating to U.S. taxpayers and introduces a detailed and complex set of requirements that Foreign Financial Institutions (FFIs) will need to meet if they are to avoid the 30% tax withholding penalty that the IRS will apply to FFIs that do not enter into the FFI Agreement or fail to meet their obligations once the FFI Agreement is signed.

The FATCA requirements are also referred to as Chapter 4, which sits alongside the existing Qualified Intermediary (QI) Program which makes up Chapter 3 of the Internal Revenue Code.

How did FATCA come about?

FATCA was enacted by the U.S. Treasury Department and IRS Department in response to a perceived abuse of the Qualified Intermediary (QI) Program to facilitate tax evasion by U.S. taxpayers. A high-profile case involving UBS AG (the world’s largest Private Bank), found deliberate and systemic abuses of the IRS QI Program by UBS selling offshore banking service to U.S. taxpayers to evade tax.

Prosecutors alleged that UBS helped American clients to hide as much as USD$20bn in assets offshore, evading at least USD$300m in taxes.

Eventually UBS settled the case by agreeing to pay an USD$800m fine.

What are the core requirements of FATCA?

FATCA requires FFIs to identify U.S. account holders in accordance with prescribed due diligence rules. There are also due diligence obligations on pre-existing accounts, meaning those accounts that exist at the commencement date of FATCA (1 Jan 2014).

In addition to customer identification of new and pre-existing accounts, FFIs must apply a 30% tax withholding penalty on certain account holders including recalcitrant accounts (meaning accounts suspected, but unconfirmed as belonging to a U.S. tax payer) and those held by Non-Participating FFIs (NPFFIs) (meaning FFIs that have either not signed the FFI agreement or had it revoked by the IRS.

There are over 180,000 FFIs impacted by FATCA – do you work for one of them?

Development of the FATCA regulations

Key dates and milestones

  • 28 January ’13 – Final FATCA Regulations released
  • 25 April ’14 – First FFI List Registration deadline (for 2 June ’14 publish date)
  • 1 July ’14 – New Customer On-boarding comes into effect
  • 30 June ’14 – FFIs must extract client, account and balance data for remediation
  • 31 March ’15 – US Person Report first due (balances only)
  • 30 June ’15 – High-value pre-existing individuals to be remediated
  • 31 March ’15 – US Person Report (balances and gross proceeds) and NPFFI Payment Reporting
  • 30 June ’16 – Low-value pre-existing individuals and entities to be remediated