FATCA stands for the Foreign Account Tax Compliance Act. It colloquially refers to provisions included in the Hiring Incentives to Restore Employment Act signed into law on March 18, 2010 and effective January 1, 2013 (although, as explained in more detail below, withholding does not start at the earliest until January 1, 2014). It adds a new chapter to the Internal Revenue Code aimed at addressing perceived tax abuse by U.S. persons through the use of offshore accounts. The new rules require foreign financial institutions (FFI’s) to provide the Internal Revenue Service (IRS) with information on certain U.S. persons invested in accounts outside of the U.S. and for certain non-U.S. entities to provide information about any U.S. owners.

FATCA withholding begins for fixed or determinable annual or periodical (FDAP) payments made on or after January 1, 2014. FATCA withholding for FDAP and gross proceeds will begin January 1, 2015. Pass-through payments will become subject to FATCA withholding no earlier than January 1, 2015.

Any entity making a payment of U.S. source income must consider whether it is subject to FATCA. FATCA may apply to both financial and non-financial operating companies. Due to this breadth, FATCA impacts virtually all non-U.S. entities, directly or indirectly, receiving most types of U.S. source income, including gross proceeds from the sale or disposition of U.S. property, which can produce interest or dividends. U.S. entities, both financial and non-financial, that make payments of most types of U.S. source income to non-U.S. persons will also be impacted as they may now be required to withhold a 30% tax on that income paid to a non-U.S. person under FATCA. This will require the U.S. entities to maintain documentation on those non-U.S. persons and also track how those persons are classified under FATCA.

In general, an FFI will enter into an agreement (referred to as “FFI Agreement”) with the U.S. Department of Treasury (U.S. Treasury) by which the FFI can avoid FATCA withholding on payments it receives (and become a participating FFI). Generally, an FFI Agreement requires a determination of which accounts are “United States accounts” (a defined term), compliance with verification and due diligence procedures, annual reporting on those United States accounts to the U.S. Treasury, compliance with additional IRS reporting requests, and withholding 30% where applicable (e.g., recalcitrant account holders, nonparticipating FFIs, electing FFIs, etc.). FFI’s that enter into an FFI agreement with the IRS will need to report the following information on their U.S. accounts:

• The name, address, and Taxpayer Identification Number (TIN) of each account holder which is a specified United States person and, in the case of any account holder which is a United States owned foreign entity, the name, address, and TIN of each substantial United States owner of such entity
• The account number
• The account balance or value at year end (to be confirmed by Regulations);
• Gross dividends, interest and other income paid or credited to the account (timing will be determined in the FFI agreement).

Alternatively, an FFI may make an election to provide full IRS Form 1099 reporting on each account holder that is a specified United States person or United States owned foreign entity as if the holder of the account were a natural person and citizen of the United States.

Reporting of gross receipts and gross withdrawals or payments from U.S. accounts will not be required for the first year of reporting (2013). However, an FFI will be required to report as a recalcitrant account holder any US Account holder identified by June 30, 2014 for which the FFI is not able to report the information required (for instance due to failure to obtain a waiver from the account holder).

An FFI that enters into an FFI Agreement by June 30, 2013 will be identified as a participating FFI and thus avoid FATCA withholding that will begin January 1, 2014. FFIs that enter FFI Agreements after June 30, 2013 but before January 1, 2014 will be considered participating FFIs for 2014, however they may be subject to FATCA withholding due the lack of time to identify them as participating FFIs before FATCA withholding begins on January 1, 2014. The effective date for FFI Agreements entered before July 1, 2013 will be July 1, 2013 and any FFI Agreement entered after June 30, 2013 will be the date the FFI enters the FFI Agreement.

Yes, FATCA has been signed into law.

At this point in time, the application of the FATCA rules is not driven by whether an FFI actually has U.S. clients (again, the rules are more focused on non-U.S. entities receiving certain types of U.S. source income and gross proceeds from the sale disposition of U.S. property which can produce US source interest or dividends). Therefore, closing such accounts will not exempt you from FATCA.

There are six indicia of U.S. status:

• U.S. citizenship or lawful permanent resident (green card) status;
• A U.S. birthplace;
• A U.S. residence address or a U.S. correspondence address (including a U.S. P.O. box);
• Standing instructions to transfer funds to an account maintained in the United States, or directions regularly received from a U.S. address;
• An “in care of” address or a “hold mail” address that is the sole address with respect to the client; or
• A power of attorney or signatory authority granted to a person with a U.S. address.

Having one of these indicia does not mean that the account is owned by a U.S. person, only that it must be given closer scrutiny.

If a non-U.S. entity does not, directly or indirectly, invest in any U.S. securities, receive any FDAP income, or receive any bank deposit interest from foreign branches of U.S. banks, then it will not be subject to FATCA withholding. The non-U.S. entity will need to monitor income sources and investments to make sure that no U.S. sourced investments are maintained, thus subjecting it to the FATCA requirements.

If you receive U.S. source income from any indirect sources, then you will have income, or gross proceeds, subject to 30% withholding. Due to the potential risk and withholding exposure, there is also the possibility that certain large financial institutions may not do business with entities that are not FATCA compliant.

The FATCA rules require that you ask any U.S. customer to waive their rights under the privacy or secrecy rules so that you can report their information to the U.S. Government. If they refuse to provide this waiver then you are required to close the account.

Whether you are impacted by the FATCA rules is not driven by whether you have a business in the U.S.. It is solely determined by whether you receive any “withholdable” payments.

For example, in the smaller towns we have customers who do not have a passport or drivers license. It seems that under FATCA they will be classified as “recalcitrant” and subjected to withholding. Is there a process to exclude these people from the documentation requirement?

No. Generally, any account holder whose account is at least $50,000 that does not comply with reasonable requests for information necessary to determine whether its account is a United States account will be a “recalcitrant account holder” and will be subject to 30% withholding on withholdable payments and gross proceeds from the sale or disposition of U.S. assets which can produce interest or dividends.

FATCA provides that an FFI should close an account holder’s account if the holder of the account fails to provide the FFI with a waiver of any foreign law that would prevent the FFI from collecting the required FATCA documentation. To date, the IRS and U.S. Treasury have only issued guidance on reporting of accounts that have not provided the required FATCA documentation.

It is expected that the information that will need to be collected will be outlined in forthcoming regulations. In the meantime, Notices 2010-60 and 2011-34 require that an FFI electronically search its records for indicia of U.S. status for existing individual accounts. Indicia of U.S. status includes:

(i) identification of any account holder as a U.S. resident or U.S. citizen;

(ii) a U.S. address associated with an account holder of the account (whether a residence address, a correspondence address, or a P.O. box address);

(iii) a U.S. place of birth for an account holder of the account;

(iv) an “in care of” address or a “hold mail” address that is the sole address on file with respect to the account holder;

(v) a power of attorney or signatory authority granted to a person with a U.S. address; or

(vi) standing instructions to transfer funds to an account maintained in the U.S., or directions received from a U.S. address.

FFIs and USFIs will also need to analyze electronically searchable information to determine whether the preexisting entity accounts belong to another foreign financial institution or a non-financial foreign entity. FFIs and USFIs will need to undertake similar procedures on new accounts using all information collected (not just “electronically searchable information”).

Absent an act of the U.S. Congress exempting certain countries from FATCA, with holdable payments to an FFI that does not participate will be subjected to 30% withholding.