Deutsche Bank

Foreign Account Tax Compliance Act (FATCA)

What is FATCA?

FATCA is the acronym for the Foreign Account Tax Compliance Act (FATCA) which was introduced in October 2009, but ultimately enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act on March 18, 2010. FATCA creates a new U.S. tax information reporting and withholding regime for payments made or received by U.S. withholding agents (USWAs), multinational companies, certain Foreign Financial Institutions (FFIs) and other foreign persons. The provisions of FATCA have a staggered implementation timeline, beginning July 1, 2014.


What is the intent of FATCA?

The objective of FATCA is to detect, deter, and discourage offshore tax evasion by U.S. citizens or residents by requesting information about U.S. persons to increase transparency for the U.S. Internal Revenue Service (IRS) and imposing a withholding tax where the applicable documentation and reporting requirements are not met. FATCA’s provisions are designed with incentives for FFIs and USWAs to provide information to the IRS on financial accounts held by U.S. persons:

  • Directly investing outside the U.S.; or
  • Indirectly investing through a non-U.S. entity

Foreign institutions outside of U.S. jurisdiction will have a strong incentive to comply in order to avoid the 30% withholding tax on any withholdable payment received from sources within the U.S. levied on non-compliant individuals and entities. U.S. source income that is fixed or determinable, annual or periodical (FDAP) income; and gross proceeds from the sale or other disposition (including redemption) of property that can produce U.S. source interest or dividend income are payments subject to 30% withholding.


What is FDAP income?

FDAP income is fixed or determinable, annual or periodical gains, profits, and income, and includes payments such as interest, original issue discount, dividends, rents, salaries, wages, premiums, and annuities. Only US source FDAP income is subject to FATCA withholding.

Does FATCA replace the existing U.S. Tax withholding and reporting regimes for US nonresidents?

No. It does not replace the existing U.S. tax withholding and reporting regimes for U.S. nonresidents. It does, however, add additional requirements and complexity to the existing regimes. In general, either the FATCA or nonresident rules will apply to an account. The IRS has expressed its intent to eliminate duplicative reporting and withholding where possible.


Who does FATCA impact?

FATCA is far-reaching and can impact any individual or entity (U.S. or foreign), to the extent that such person is involved in making or receiving payments that fall within the scope of FATCA. While FATCA certainly affects U.S. withholding agents and U.S. multinational companies, its greatest impact is on foreign financial institutions (FFIs).


How does FATCA impact Deutsche Bank and its clients?

To be FATCA compliant, Deutsche Bank has registered its own FFIs with the IRS and must collect and verify appropriate client information; DB must then report to the IRS and/or local government authorities that have entered into Intergovernmental Agreements. The FATCA regulations require Deutsche Bank to review existing onboarding and withholding processes and enhance them where necessary to satisfy FATCA regulations.

Deutsche Bank is proactively implementing changes to its current business practices in order to comply with FATCA while best serving its clients and counterparties.


What are the consequences to a Foreign Financial Institution of having an account that has indicia of U.S. status?

If an account has indicia of U.S. status, such as a U.S. mailing address, the Foreign Financial Institution (FFI) must obtain documentation to confirm the US or non-U.S. status of the account holder. If documentation is not obtained to establish that the account is not a U.S. account, the FFI will be required to report the account to the IRS as either a U.S. account or a recalcitrant account. The FFI may also have to withhold FATCA tax on certain payments made to the account.


When does FATCA withholding begin?

FATCA withholding on U.S. source FDAP income, including interest and dividends, will generally begin on July 1, 2014 for non compliant individuals and documented Non Participating FFIs and January 1, 2015 for non compliant entities. Withholding begins on gross proceeds from the sale of property that can produce U.S.-source dividends or interest on January 1, 2017.


What are the compliance requirements?

To comply with the final FATCA regulations released on January 17, 2013, all financial institutions must identify and classify their account holders and report on all accounts (products and services) directly or indirectly owned by U.S. taxpayers, foreign financial institutions (FFIs) and non-financial foreign entities as required.

FATCA compliance requires FFIs, including foreign subsidiaries of U.S.-based organizations, take steps to:

  • Enter into an FFI agreement with the IRS that states its intent to comply with FATCA
  • Conduct due diligence for new and existing accounts to classify account holders or investors as either U.S. or non-U.S.
  • Withhold 30% in U.S. taxes when individuals fail to provide the appropriate documentation or when doing business with non-compliant entities
  • Report account information directly to the IRS or indirectly through their national government which have signed Intergovernmental Agreements (IGA)


What is an Intergovernmental Agreement or IGA?

An Intergovernmental Agreement (IGA) is a bilateral agreement between a country’s government and the U.S. government that facilitates compliance with FATCA. The model agreements enable FFIs in the designated jurisdictions to comply with FATCA, especially where privacy laws exist. There are currently two types of IGAs, Model I and Model II.

A Model I agreement allows FFIs within the country to report to the local country authority, which will then provide the information to the IRS. Each country’s tax authority has a separate Model I Agreement with the IRS, which includes country-specific provisions in addition to simplified due diligence and withholding requirements. Under a Model II agreement, the FFI would directly report information to the IRS.


What are the deadlines?

FFI Registration:
The IRS portal for FFI registration officially opened on January 1, 2014. An FFI had to register online by May 5, 2014 to be included on the first published IRS list of FFIs released on June 2, 2014. The earliest effective date of an FFI agreement is June 30, 2014. FFIs in Model 1 IGA jurisdictions have more time to register and be listed since withholding agents are not required to confirm registrations before January 1, 2015.
 
Client Due Diligence:
FATCA will enforce new account opening processes and procedures effective July 1, 2014. A phased approach will be taken to enforce remediation on pre-existing accounts based on whether the accounts are (1) prima facie FFIs whereby the deadline is December 31, 2014, (2) high-value individual accounts whereby the deadline is July 1, 2015 and (3) all remaining accounts whereby the deadline is July 1, 2016.
 
IRS Notice 2014-33 issued on May 2, 2014 established that any obligation for an entity that is established between July 1, 2014 and December 31, 2014 be treated as a pre-existing obligation. It also allows entity accounts, but not individual accounts, opened during this period to be treated as pre-existing accounts.
Withholding:
FATCA withholding on new non compliant individual and documented NPFFI accounts will begin effective July 1, 2014.. Withholding certificates and documentary evidence normally expiring on December 31, 2013 will now expire on December 31, 2014, unless a change in circumstances occurs that would otherwise render the withholding certificate or documentary evidence incorrect on unreliable.
 
Reporting:
Effective March 31, 2015, FATCA reporting will begin for a Participating FFI’s U.S. accounts identified by December 31, 2014 for calendar year 2014 activity. FFIs in Model 1 IGA countries have until September 30, 2015 (to report to local tax authorizes). 



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Last Update: June 30, 2014
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