Removing the Veil
How FATCA will affect your foreign financial dealings
By Mary Vasilescu
If you have offshore financial interests or make payments to foreign entities, you need to know about the Foreign Account Tax Compliance Act, which removes the veil from foreign banks and other entities that enable U.S. citizens to evade taxes on assets accumulated in other countries. Foreign entities are required to satisfy payment documentation and reporting requirements. Lacking the cooperation of those entities, 30 percent of applicable U.S.–sourced income payments will be withheld as a U.S tax.
According to the IRS, “The objective of FATCA is the reporting of foreign financial assets; withholding is the cost of not reporting.”
It’s new, and it’s cumbersome, but here is an overview of this new act and next-step advice.
FATCA was passed by Congress in 2010, and the government began to seek compliance from foreign nations and their banking systems on the information reporting requirements of the new act.
U.S. citizens and residents who have a cumulative total of $10,000 or more in foreign banks previously had to fill out forms to satisfy the requirements of the Foreign Bank Account Report (FBAR). But FATCA added as a new filing requirement in 2011, Form 8938, which includes all forms of financial assets, not just cash in offshore bank accounts.
For entities, the law went into effect on July 1, 2014. The U.S. Treasury requires a withholding agent to withhold 30 percent of qualifying gross payments paid to any individual or legal entity deemed noncompliant under FATCA. FATCA imposes new registration and reporting requirements for foreign financial institutions (FFIs) and nonfinancial foreign entities (NFFEs).
It’s not all bad news, however. Certain foreign-based financial transactions do not have to be reported or withheld as part of FATCA. These include grandfathered obligations in existence as of July 1, 2014, and payments for:
- Services, including wages and employee compensation
- Use of property
- Transportation and freight
- Interest on accounts payable arising from the acquisition of goods and services
How to proceed
If you have or have had in the last year, any foreign assets, or conducted business with foreign individuals or entities in 2014, mention it as your tax filings are being reviewed. Your tax preparer can help you determine whether you are responsible for complying with FATCA, help you establish a FATCA compliance plan and fill out the appropriate filing documents (Form 8938, Form W-9, Form W-8 or proper variant, Forms 1042 and 1042-S) for yourself, your business and any other person for which such a form would be required.
Your experienced tax preparer can help you identify how FATCA will impact you and your business, stay in compliance and minimize the filing hassle and impact on your bottom line business and personal assets.