The Foreign Account Tax Compliance Act (FATCA), the law that imposes a withholding tax on payments from U.S. sources to certain noncompliant foreign entities, is now in effect.
Signed into law in 2010, FATCA is intended to keep U.S. businesses and individuals from avoiding taxes by holding money outside the country. It requires foreign financial institutions (FFIs) and certain nonfinancial foreign entities (NFFEs) to report information on U.S. citizens that have over $50,000 in holdings to the Internal Revenue Service (IRS). Banks are even required to withhold money from clients who are suspected of tax evasion. Failure to comply could result in a 30 percent withholding tax on payments of U.S. source income.
Corporate treasury departments and tax departments have been working over the past few years to ensure that they are FATCA compliant. They’ve had to determine whether their organizations or any of their subsidiaries can be defined as FFIs or non-exempt NFFEs. If so, they are required to register with the IRS. The IRS is posting the first list of registered FFIs on June 2 and will post monthly updates thereafter. FFIs and non-exempt NFFEs that are not FATCA compliant as of Tuesday are subject to payment withholdings.
Though the IRS announced in May that it would treat 2014-2015 as a transition period, S. Michael Chittenden, a senior associate with Miller & Chevalier, urged attendees
at AFP’s last Treasury Advisory Group meeting to comply under the original timeline. “It’s a very nebulous standard; it’s up to the agent to decide whether or not you complied in good faith,” he said. “You probably are going to have to go to appeals and fight about it, which involves hiring lawyers. So basically, keep working, and try to comply.”Worldwide adoption
For the past year, the U.S. has been negotiating agreements with various countries. To date, 86 have reached official or preliminary agreements, including China and the Cayman Islands.
“We now have FATCA agreements treated as in effect with nearly 90 jurisdictions around the world, which is a remarkable achievement, and we have around 80,000 foreign financial institutions that have registered with the IRS to perform the required due diligence when folks open their accounts and report information, either through their governments or directly to the IRS about the U.S. account holders in their financial institutions,” a treasury official told
Accounting Today. “We will continue to work with our international partners in our efforts to crack down on international tax evasion and create a more fair and transparent global tax system.”
One country that signed on—albeit at the last minute—was Russia. President Vladimir Putin signed a law that allows Russian banks to send American taxpayer data to the U.S. The U.S. and Russia were in talks over a deal back in March, but Russia’s annexation of Crimea caused discussions to cease. If no deal had been reached, Russian banks risked being frozen out of U.S. markets. VTB, Russia’s second largest banking group, was planning to “phase out” relations with its 2,000-plus U.S. clients
if no deal was reached, according to The Moscow Times.