Foreign Account Tax Compliance Act (FATCA)

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Summary: The Foreign Account Tax Compliance Act (FATCA) is a United States law that was enacted in 2010 to combat tax evasion by US taxpayers with foreign accounts.

The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions (FFIs) to report information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest, to the Internal Revenue Service (IRS).

FATCA aims to ensure that US taxpayers with foreign accounts are paying their fair share of taxes. It does this by requiring FFIs to report information about these accounts to the IRS, which can then use this information to identify taxpayers who may not be paying their full share of taxes.

Under FATCA, FFIs are required to report the following information about financial accounts held by US taxpayers or foreign entities with substantial US ownership:

  • Account holder’s name, address, and taxpayer identification number (TIN)
  • Account number
  • Account balance or value
  • Gross amount of dividends, interest, and other income paid or credited to the account

FFIs that fail to comply with FATCA’s reporting requirements may be subject to a 30% withholding tax on certain types of payments made to them by US payors.

To facilitate the reporting of this information, FFIs may enter into agreements with the IRS to become “FATCA-compliant.” These agreements typically involve the FFI agreeing to implement certain due diligence procedures to identify and report on accounts held by US taxpayers or foreign entities with substantial US ownership. In return, FFIs that enter into such agreements may be exempt from the 30% withholding tax.

FATCA has had a significant impact on the financial industry, as many FFIs have had to invest significant resources in order to become compliant with the law. It has also led to increased cooperation between the US and other countries on tax matters, as many countries have entered into intergovernmental agreements (IGAs) with the US to facilitate the implementation of FATCA.

Example:

Alice is a US citizen who lives in France and has a bank account at a French bank. Under FATCA, the French bank is required to report information about Alice’s account to the IRS. This includes her name, address, TIN, account number, account balance, and any income paid or credited to the account. If the French bank fails to report this information to the IRS, it may be subject to a 30% withholding tax on certain types of payments made to it by US payors.

However, if the French bank enters into a FATCA agreement with the IRS, it will be required to implement certain due diligence procedures to identify and report on accounts held by US taxpayers or foreign entities with substantial US ownership. In return, the French bank may be exempt from the 30% withholding tax.

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