1. What is FATCA compliance and Why do I need to know about FATCA?
The Foreign Account Tax Compliance Act (FATCA) has had important implications for the way US expats manage and declare their wealth in recent years. Its impact is far-reaching and the penalties for non-compliance are onerous, so while you don’t need to know the minutiae, you do need to know what is FATCA reporting and how it affects you.
2. What is FATCA compliance and reporting?
FATCA was introduced in 2010, aiming to identify US citizens evading tax by using offshore investment vehicles. Partly this was a revenue-raising exercise - US congress estimated that tax evasion cost the Internal Revenue Service (IRS) up to $100bn per annum – but it also came at a time when policymakers were fearful that offshore vehicles were being used to fund criminal activity. As such, the US authorities take FATCA compliance very seriously, hence the importance of understanding what is FATCA reporting.
3. Who does the FATCA filing requirement apply to?
The FATCA filing requirement extends to all US citizens, US residents, green card holders and trusts controlled by US-connected people. The legislation around the FATCA filing requirement includes those who live outside the US and may have done so for some time. Even those who have never lived in the US but were born there, or those married to a US citizen, have found themselves caught by the FATCA filling requirement and legislation to some extent.
4. What are my obligations under the FATCA filling requirement legislation?
We now understand both what is FATCA compliance, and what is FATCA reporting. FATCA compliance requires US citizens to report all financial accounts held within Foreign Financial Institutions (FFI’s) outside the US. The Act also requires FFI’s to report to the IRS - or the relevant domestic authority if there is an intergovernmental approach - about their US clients, using form 8938, if foreign financial assets are above the appropriate reporting threshold.
In other words, FATCA regulations dictate that your bank has to report back on any assets you hold with them, including name, address and account numbers. They must also report the highest daily account value for the year, plus inflows and outflows to the account. This can make some institutions reluctant to deal with US citizens.
In terms of banking and investments, FATCA reporting requirements apply for most types of financial institutions that receive US income and hold US investments. These include all Channel Island funds and investment structures that hold US financial assets or receive certain US-sourced income.
However, even if a financial institution doesn’t hold US assets or receive US income, they may still be affected by FATCA filling requirements as they may be part of an affiliated group or receive pass-through payments from other financial institutions. Included in the definition of FFIs are:
- Collective Investment Vehicles
- Hedge Funds
- Private Equity Companies
- Investment banks
What are the implications?
The administrative difficulty of FATCA reporting on all US-connected people has led many financial institutions to shy away from advising on and managing their money. This comes at a time when the foreign account reporting and investment requirements have become increasingly complex and the need for advice greater than ever.
5. What are the implications for non-compliance?
FFI’s that do not enter a legally binding agreement with the IRS to make the appropriate disclosures about their US clients face a 30% rate of withholding tax on all relevant payments received. For investors, that may mean 30% of all deposits, dividend or interest payments are withheld.
There are also penalties for failure to report properly. For individuals, reporting on non-US financial accounts for amounts over $10,000 is done by way of a FBAR form. The penalty for failing to file an FBAR is $10,000, providing the IRS deems it ‘non-wilful’. If the violation is considered ‘wilful’, the potential penalties are even higher – the greater of $100,000 or 50% of the amount in the account for each violation.
In addition, US-connected people must file IRS Form 8938 if total foreign financial assets owned exceeded $50,000 on the last day of the tax year or more than $75,000 at any point during the year. These limits rise to $200,000 and $300,000 for people living outside the US, but investors should remember that this will include pension assets.
FATCA has prompted a significant shift in the reporting and tax rules for US citizens abroad. The IRS is also dramatically increasing the extent to which it enforces the rules, so there’s no escape. Those with connections to the US need to make sure that they are fully compliant with the FATCA rules or face some nasty penalties.
Choosing an adviser
Negotiating the complexities of the US/UK tax system, finding the right investment management, while staying on top of your long-term plans is no mean feat.
It is key that US/UK families find an investment advisor that can not only put a compliant investment strategy in place, but can also produce the US/UK investment information and manage their US, UK and offshore investments cohesively.