FATCA (originally called the Stop Tax Haven Abuse Act in a bill introduced on 2/17/07 by Sen. Levin (D-Mich.), then chair of the Senate Permanent Subcommittee on Investigations, Sen. Coleman (R-Minn.), then the ranking Republican on the subcommittee, and Sen. Obama (D-Ill.), then a member of the subcommittee), is designed to deter the use of tax havens for committing acts of tax evasion. A later version was submitted by Senators Baucus (D-Mont.), chair of the Senate Finance Committee, Sen. Kerry (D-Mass) and Reps. Rangel (D-NY), then chair of the House Ways and Means Committee and Neal(D-Mass), chair of the Ways and Means Subcommitee on Select Revenue Measures.
FATCA provides for: (i) increased levels of mandatory disclosure of offshore investments; (ii) an extended applicable statute of limitations; (iii) increased penalties for related compliance failures and (iv) sets forth rebuttable presumptions to enhance the government’s ability to impose sharp sanctions and penalties in prosecuting tax cases involving offshore compliance. The FATCA provisions will also have a direct impact on the tax treatment of foreign trusts, certain dividend equivalent payments and certain foreign targeted obligations. A prior version contained a provision requiring "material advisors" who structured and/or worked on a foreign entity transaction to disclose the transaction . This controversial provision, that was to be reflected in new §6116, was dropped from FATCA. FATCA was employed as a revenue offset for the Hiring Incentives to Restore Employment Act (HIRE; P.L. 111-92, 3/18/10), of which it is a part.
Information Returns—Increased Disclosure of Information About Foreign Entities
The default rule is that there will be a 30% withholding tax by the U.S. payor on the payment of certain income earned from U.S. sources to foreign financial institutions and foreign nonfinancial entities. The default rule can be avoided if the foreign entities provide the government with information regarding U.S. taxpayers. In addition, taxpayers are required to file disclosures reporting (1) the existence of foreign financial assets when the aggregate value of all such assets exceeds $50,000, (2) investments in passive foreign investment companies (PFICs), and (3) interests or involvements with foreign trusts.
Financial Financial Institution Disclosure
In addition, after 3/18/10 Treasury can issue Regulations requiring foreign financial institutions and foreign nonfinancial institutions to file on magnetic media all returns to report taxes withheld. This requirement applies equally to withholding pursuant to Section 1441 or new Section 1474(a) . Treasury also can require financial institutions to electronically file returns for taxes they withhold regardless of how many returns the institutions file during the year. Consequently, the IRS may assert a failure-to-file penalty under Section 6721 on financial institutions that fail to comply with these new electronic filing requirements.
Institutions are required to file this information annually with respect to all of their U.S. account holders. Under §1471(c)(1), actual disclosure includes: (i) the identifying number of the U.s. account holder or U.S. owner of a foreign entity holding an account at the institution; (ii) the account number; (iii) account balances; and (iv) the gross deposits and withdrawals from the account, i.e., account activity.
If a foreign financial institution can prove to the IRS that it does not have any U.S. customers and agrees to adhere to further IRS reporting pronouncements, it will be exempt from §1471(b) withholding and §1471(c) disclosure provisions. Such institution also may be exempt if Treasury determines that it is one of a class for which the new rules are not necessary.
A foreign financial institution also may agree to the §1471 withholding and bypass the §1471(c)(1) disclosure if it makes an election under §1471(c)(2) to be subject to the same reporting requirements as a U.S. financial institution under §§6041 , 6042 , 6045 , and 6049 .
Under §1471(b)(3) a foreign financial institution making U.S. source payment to another FFI which does not comply with FATCA, it may reject serving as a withholding agent for U.S. source payments. Where an election under §1471(b)(3) is filed, the required withholding will apply with respect to any payment made to the electing foreign financial institution to the extent the payment is allocable to accounts held by foreign financial institutions that do not enter into an agreement with Treasury or to payments made to recalcitrant account holders (i.e. an account holder that refuses to provide required information). A foreign financial institution making the election under §1471(b)(3) must notify the withholding agent of the election and provide information necessary for the withholding agent to correctly determine the amount of the withholding. Special rules apply with respect to tiered FFIs.
The effective date of §1471 is for payments made after 2012, and will not apply to any obligation or disposition of an obligation made prior to 3/18/12.
These rules do not apply to any payment beneficially owned by a publicly traded corporation, a corporation that is a member of an expanded affiliated group that includes a publicly traded corporation, any foreign government, any international organization or instrumentality or any foreign central bank.
U.S. persons who buy U.S. securities from a foreign entity are obligated to obtain the certification or else withhold the 30% tax on the purchase. Consequently, it is not just U.S. institutions that are required to withhold. The obligation is imposed on all U.S. withholding agents. The rules described above do not apply to any class of payments later identified by Treasury as posing a low risk of tax evasion.
Foreign Accounts and Assets
The FBAR report is generally required to be filed by a U.S. person with a financial interest, signature authority, or other authority over foreign financial accounts if at any point during the calendar year the aggregate value of all such foreign accounts equaled or exceeded $10,000, even if only for one day. Section 6038D disclosure is required to report "specified foreign financial assets" when the aggregate value exceeds $50,000. Section 6038D(b) defines a "specified foreign financial asset" to include ownership of: (i) a financial account maintained by a foreign financial institution; (ii) a stock or security issued by a non-U.S. person; (iii) a financial interest or contract held for investment that has a non-U.S. issuer or counterparty; and (iv) an interest in a foreign entity. Under §6038D, a "foreign entity" includes any entity that is not a U.S. person. This last category is extremely broad in application. The filing requirement under §6038D is directed toward U.S. individuals although the Treasury has the ability to require "any domestic entity which is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets," to file the disclosure as if it were an individual. Regulations exempting nonresident aliens and bona fide residents of any U.S. possession from the disclosure. Are anticipated. Certain assets may also be exempt from disclosure.
The information to be disclosed under new Section 6038D includes: (i) the name and address of the financial institution in which the account is maintained; (ii)account number; (iii) for any stock or security, the name and address of the issuer and other information necessary to determine the ownership; (iv) as to an "instrument", the names and addresses of all issuers and counterparties; and (v)the maximum value of the asset during the tax year.
The minimum penalty for failing to submit the required disclosure is $10,000, and it increases by $10,000 for each 30-day period following notification from Treasury, with the maximum penalty being $50,000. There is, however, a 90-day grace period following notification from the Treasury before the additional $10,000 penalties accrue. This is similar to the penalty for failure to file Form 5471 and Form 3520. As with those information returns (relating to foreign corporations and foreign trusts or foreign gifts, respectively), the penalty may be waived if the taxpayer is able to demonstrate that the failure to file was due to reasonable cause.
Expanded Statute of Limitations.
Foreign Trusts and Certain Grantor Trusts.
Notice 2010-60, supra, identifies entities excluded from the financial institution definition or that are otherwise exempt from some or all of the obligations imposed by the offset provisions. Generally, these include some insurance companies and holding and startup companies. The notice describes the scope of collection of information and identification of persons by financial institutions under sections 1471 and 1472, and the information FFIs must report to the IRS regarding their U.S. accounts. The notice also outlines the IRS's intention to require all or most financial institutions to electronically file their returns regarding tax for which the institutions are liable under the foreign tax compliance offset provisions. A detailed review of the Notice is not set forth in this information capsule. Anyone having questions about FATCA, the Notice 2010-60, the relevant statutory provisions involved, etc., must consult with their legal advisor who is competent to render advice in this area of the tax law. Therefore this release is for informational purposes only and may not be relied upon by anyone reading this post or in advising clients.
. Before FATCA was enacted, §643(i) provided that a loan of cash or marketable securities from a foreign trust to a U.S. grantor, U.S. beneficiary, or another other U.S. person who was related to a U.S. grantor or U.S. beneficiary was generally required to be treated as a distribution (potentially from DNI and interest surcharge) by the foreign trust to such grantor or beneficiary. FATCA amends §643(i)(1) in setting forth that any use of trust property after March 18, 2010 by a U.S. grantor, U.S. beneficiary, or any U.S. person related to a U.S. grantor or U.S. beneficiary is treated as a distribution. This rule does not apply to the extent that the foreign trust is paid the fair market valuefor the use of the property within a reasonable time following the use. A subsequent return of the property to the foreign trust is disregarded for tax purposes §643(i)(3) . But see §§679 and 6048. Form 3520. Special rules apply with respect to foreign trusts and grantor trusts . See §679. Under §679(c)(1), amounts accumulated in a foreign trust as treated as being held for the benefit of a U.S. person even if the U.S. person's interest in a foreign trust is contingent on a future event. Under §679(c)(4), where any person has discretion to make a distribution from a foreign trust to, or for the benefit of, any person, the trust will be treated as having a U.S. beneficiary unless the terms of the trust specifically identify the class of persons to whom the distributions may be made and none of those persons can be U.S. persons during the tax year. Furthermore, §679(c)(5) provides where any U.S. person who directly or indirectly transfers property to a foreign trust is directly or indirectly involved in any agreement or understanding that may result in the trust's income or corpus being paid or accumulated for the benefit of a U.S. person, the agreement or understanding will be treated as a term of the trust. In essence, any discretion held by a trustee or protector to make a distribution or accumulate income for a U.S. person will be deemed to have been exercised. New §679(c)(6) provides that any loan of cash or marketable securities (or the use of any other trust property) directly or indirectly to or by any U.S. person will be treated as paid or accumulated for the benefit of such U.S. person. Where, however, the U.S. person repays the loan at a market rate of interest or pays the FMV for the use of the property within a reasonable time the provision will be avoided. Finally, under new §679(d) where a U.S. person transfers (directly or indirectly) property to a foreign trust, the trust will be presumed to have a U.S. beneficiary unless the transferor submits information, as requested by Treasury, to demonstrate that no part of the income or trust may be paid or accumulated to or for the benefit of a U.S. person. Instead of the general 3 year rule for assessing an income tax within 3 years of filing a return, which expands to 6 years where a taxpayer omits 25% or more of the income that should have been reported in gross income, FATCA §6501(e) to extend application of the six-year period where a taxpayer omitted more than $5,000 of income attributable to one or more assets required to be reported under §6038D . In addition, the 3 year and 6 year statutes of limitation will be suspended until the information required to be reported under Section 6038 , 6038B , 6046A , or 6048 , or new §6038D is provided to the IRS. The extended limitations periods are applicable to: (i) returns filed after March 18, 2010; and (ii) returns filed on or before that date if the limitations period under § 6501 has yet to expire. For FATCA filing failures, new §6662(j) increases the standard 20% accuracy related penalty to a 40% penalty on any portion of an underpayment attributable to an undisclosed financial asset that should have been reported under §§ 6038 , 6038B , 6046A , or 6048 , or new § 6038D The increased penalty regime is effective as of the tax year beginning after the date of enactment (i.e., after 2010 for calendar-year taxpayers). . Generally, a foreign corporation will qualify as a passive foreign investment company or PFIC where: (i) 75% or more of its gross income in the tax year is passive income, or (ii) on average during the tax year at least 50% of the assets held by the corporation produce passive income or are held for the production of passive income. FATCA section 521 adds new §1298(f) subjecting persons owning shares in a PFIC to file an annual information return disclosing their ownership of the PFIC. This replaces current law under which disclosure was required only when the taxpayer made a QEF election or disposed of the interest in the PFIC. The PFIC disclosure requirement became effective as of 3/18/10. See, however, Notice 2010-34, 2010-17 IRB. . FATCA imposes a second filing requirement (in addition to the FBAR filing requirements) on U.S. taxpayers with foreign accounts and assets. FATCA §511 creates new §6038D , which requires U.S. taxpayers with foreign accounts and assets to report these investments on an information return when the aggregate value of the investments exceeds $50,000. Section 6038D applies to assets held during tax years beginning after 3/18/10. The new reporting requirement is broader than the current FBAR, so it is possible that individuals who do not have an FBAR filing obligation presently may still be subject to the new reporting requirement. For example, FATCA requires taxpayers with investments in foreign entities, such as foreign hedge funds and private equity funds, to report the existence of these investments. Currently the FINCEN FBAR regulations issued in February, 2010, exempt these types of assets from FBAR reporting. There are separate penalties for failures under each provision although the FBAR penalties are more severe. The required information is to be attached Form 1040. This additional form of disclosure does not replace the FBAR filing requirement which is filed with the Detroit Service Center. . New §1472 imposes a 30% withholding tax on any payment made to a nonfinancial foreign entity from a U.S. payor where: (i) the beneficial owner of the payment is a nonfinancial foreign entity and (ii) all of the following requirements are not met with respect to the beneficial owner: (1) the beneficial owner or payee provides the "withholding agent" with either (a) a certification that the beneficial owner does not have any substantial U.S. owners (i.e., more than a 10% direct or indirect interest), or (b) the name, address, and TIN of each substantial U.S. owner of the beneficial owner; (2) the withholding agent does not know, or have reason to know, that any information provided as described above is incorrect; and (3) the withholding agent provides the information described above to Treasury in the manner provided for by Treasury. . Foreign financial institutions (FFIs) include, but are not limited to, banks, brokerages, and investment funds. Furthermore, non-publicly-traded equity and debt interests in FFIs are deemed to be accounts for purposes of this section. Such foreign financial institutions have the option of disclosing their U.S. account holders to the IRS. Failure to comply with the disclosure requirement will subject the institution to financial penalties in the form of a 30% withholding tax by U.S. payors on payments of certain U.S. source income. FFIs desirous of complying with the disclosure requirement must agree to the conditions set forth in §1471(b): (i) obtain information from each holder of an account at the financial institution to determine if any of its accounts is a U.S. taxpayer account; (ii) comply with any due diligence procedures required by the Service in relation to a U.S. taxpayer account; (iii) provide an annual report to Treasury on any U.S. taxpayer accounts maintained by the institution; (iv) deduct and withhold 30% from certain pass-through payments made to recalcitrant U.S. taxpayer account holders or certain other foreign financial institutions; (v) comply with any information requests by the IRS with respect to any U.S. taxpayer account; and (vi) procure a waiver of any foreign law from each U.S. taxpayer with an account, where such foreign law would prohibit the financial institution from disclosing information. . Under FATCA §501 a new withholding regime is contained in new §§1471 and 1472 which are generally applicable to payments made after 2012. These rules require foreign financial institutions with U.S. customers and foreign nonfinancial entities with substantial U.S. owners to disclose information regarding U.S. taxpayers. Failure to disclose the information to the Service will result in a U.S. payor's being required to withhold a 30% tax on certain U.S. source income. The withholding will occur on income normally subject to U.S. taxation, such as dividends, as well as to income that is generally excluded under §871 such as bank interest and capital gains. Failure to comply will subject the U.S. withholding agents to financial penalties.