Tax Avoiders Beware: Disclosure of Foreign Assets Held By U.S. Taxpayers Underway by Jenny C. Lin
Affected Withholding Agents and Foreign Financial Institutions Should Ensure Proper Procedures Are in Place
W
hile the Internal Revenue Service (IRS) and U.S. Department of Justice were diligently investigating and pursuing taxpayers and foreign banks for their roles in the use of offshore financial accounts to avoid or evade U.S. income tax and reporting requirements, Congress passed the Foreign Account Tax Compliance Act (FATCA), formally titled the Hiring Incentives to Restore Employment Act of 2010, 124 Stat. 71, relevant provisions codified at I.R.C. §§ 1471-74, to require more transparency relating to accounts with foreign financial institutions (FFIs) and assets with non-financial foreign entities (NFFEs). There are two aspects to FATCA. One aspect requires additional reporting to the IRS by U.S. taxpayers as to specified foreign financial assets. The additional reporting requirement by U.S. taxpayers is effective commencing the 2011 tax year. Another aspect requires due diligence and reporting by participating FFIs and NFFEs, and the withholding of certain U.S.-sourced payments by withholding agents and participating FFIs. The due diligence, information reporting and withholding requirements are being implemented in phases beginning January 1, 2014, with full implementation by 2017.1 This article is intended to provide general information only as to FATCA provisions affecting withholding agents and participating FFIs.2
General Requirements Under FATCA In general, FATCA requires withholding agents to withhold 30 percent on “withholdable payments” to a payee that is an FFI or a NFFE, if the FFI or NFFE does not meet certain requirements under U.S. tax law.3 There are two broad classes of withholdable payments as follows:4 1. Payment from a U.S. source of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments and other fixed or determinable annual or periodical gains, profits (FDAP income). 12
MARCH 2014
2. Any gross proceeds from a U.S. source after December 31, 2016, from the sale or other disposition of any property that can produce interest or dividends that are FDAP income.
FFIs Exempt From Withholding Regime In order to avoid withholding on payments to an FFI, the FFI must have an agreement in place with the IRS or be resident in a jurisdiction that has an intergovernmental agreement in effect with the U.S.5 With respect to agreements between an FFI and IRS directly, the FFI must agree in general to:6 • Obtain information from account holders with respect to accounts maintained by the FFI to determine if such account is held by one or more U.S. persons or U.S.-owned foreign entities (U.S. accounts). • Comply with verification and due diligence procedures with respect to the identification of U.S. accounts. • File an annual report with the IRS with respect to each U.S. account, including the name, address and taxpayer identification number of each account holder who is a U.S. person or the substantial U.S. owners of a foreign entity, account number, account balance or value, and gross receipts and gross withdrawals or payments from the account. • Deduct and withhold a 30 percent tax on any passthru payment made by the FFI to an accountholder who refuses to provide information and/or documentation to determine whether the account is a U.S. account or provide a waiver to allow the FFI to provide information on the account to the IRS.