What Tax Information will the U.S. Provide to Other Countries on Sep 30?
What is FATCA?
The Foreign Account Tax Compliance Act (FATCA) is just the latest manifestation of a long tradition of international cooperation for law enforcement and tax collection purposes, specifically contained in various Tax Information Exchange Agreements that the U.S. has signed with a multitude of other countries. FATCA imposes a 30% withholding requirement on payments from the U.S. to any Foreign Financial Institution (FFI) that has not registered with the IRS and agreed to follow certain procedures for detecting and reporting accounts held by U.S. taxpayers.
In order to improve tax compliance and implement FATCA, the U.S. has entered into Intergovernmental Agreements (IGAs) that essentially require treaty partners (FATCA Partners) to adopt FATCA as their national law. FFIs in FATCA Partner countries are deemed to be in compliance pursuant to their own country’s law. If the applicable IGA is “Model 1” IGA, then the FFI reports certain information to their local tax authorities which in turn provide the information automatically to the IRS.
Some countries have negotiated for “reciprocal” Model 1 IGAs, meaning that U.S. financial institutions are reporting certain information about accounts held by residents to the IRS, which will in turn provide that information automatically to the tax authority of the FATCA Partner. In Latin America, these FATCA Partner countries include Brazil, Colombia, Costa Rica, Honduras, Mexico, Portugal and Spain. For purposes of this article, the names of any of these countries can be used in place of “FATCA Partner” below. Agreements are pending with the Dominican Republic, Panama and Peru.
What types of US accounts are subject to FATCA reporting?
Two types of U.S. accounts are subject to FATCA reporting and are referred to as “Reportable Accounts”. The first type is a Depository Account held by an individual who is a resident of a FATCA Partner country and that receives more than $10 of interest in any given calendar year. Depository Accounts are basically checking, savings, certificates of deposits and similar types of accounts, including certain interest-bearing insurance investments. The other type of Reportable Account is a Financial Account held by a resident of the FATCA Partner country, including entities that certify that they are resident in the FATCA Partner country for tax purposes. A Financial Account is basically any account maintained at a Financial Institution.
What information is reported?
With respect to each Reportable Account, the United States is required to report the following information to the tax authority of each FATCA Partner:
(1) the name, address, and FATCA Partner Tax Identification Number of any person that is a resident of the FATCA Partner country and is an Account Holder of the account;
(2) the account number (or the functional equivalent in the absence of an account number);
(3) the name and identifying number of the Reporting U.S. Financial Institution;
(4) the gross amount of interest paid on a Depository Account;
(5) the gross amount of U.S. source dividends paid or credited to the account; and
(6) the gross amount of other U.S. source income paid or credited to the account, to the extent subject to reporting
When will this be reported?
U.S. financial institutions should already have reported this information for 2014 to the IRS on the applicable Form 1042 that was due March 16, 2015. The Model 1 IGAs provide that the IRS should automatically exchange this 2014 information by September 30, 2015.
How will the information be reported?
The Model 1 Agreements contain provisions regarding confidentiality and the required safeguards and infrastructure that must be in place to ensure timely and accurate exchanges and states that the information exchanged will be kept confidential and used solely for tax purposes. Before engaging in information exchange with a FATCA Partner country, the U.S. must evaluate the other country’s exchange of information safeguards as well as the country’s infrastructure for an effective exchange relationship. Each tax authority must also register with the International Data Exchange Service (IDES) to receive information automatically. The IDES is an electronic delivery point where Financial Institutions and Tax Authorities can transmit and exchange FATCA data with the United States. It is unclear which FATCA Partners will have completed the IDES enrollment and verification process in order to receive information from the U.S. by September 30.
What does FATCA mean for U.S.-Connected families?
Now more than ever, international families with U.S. investments or a member who is or might become a U.S. tax resident, and who have not received current legal advice regarding their wealth from an experienced, independent and practicing U.S. international tax attorney, should act quickly to ensure that their wealth is properly structured for maximum tax efficiency and legal advantage. U.S. citizens and tax residents, living in the U.S. or abroad, who have accidentally or intentionally failed to report income, bank accounts, corporations, trusts or other assets outside the U.S. are increasingly at risk of being detected, fined and in some cases even incarcerated and deported.
When given the opportunity, we prefer to help our clients proactively arrange their affairs to reduce their tax burden to the legal minimum. Anyone unsure whether they have fulfilled all their tax and information reporting obligations should seek the privileged advice of a U.S. tax attorney as soon as possible to determine the safest and most economical way of resolving their non-compliance prior to detection.
Contact us at 305-444-7662 or Ed@AristaLaw.com for a confidential consultation.