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FATCA Special

By Lowtax Editorial
08 May, 2017

Described by the former administration of President Barack Obama as a "major milestone" on the path to eradicating offshore tax evasion, but branded by its critics as "the worst law that most Americans have never heard of", the Foreign Account Tax Compliance Act (FATCA) went into force on July 1, 2014 after a long period of preparation by the Internal Revenue Service (IRS), foreign revenue agencies and foreign financial institutions (FFIs). The law's main provisions are described in this special feature.

FATCA – A Summary

Signed by President Obama in March 2010 as a revenue provision to the Hiring Incentives to Restore Employment Act (HIRE Act), FATCA is designed to tackle the non-disclosure by US citizens of taxable income and assets held in foreign accounts. The law is intended to ensure that the US obtains information on accounts held abroad at FFIs by US persons. Failure by an FFI to disclose information on their US clients, including account ownership, balances and amounts moving in and out of the accounts, will result in a requirement on US financial institutions to withhold 30 percent tax on US-source income. The HIRE Act also contained legislation requiring US persons to report, depending on the value, their foreign financial accounts and foreign assets.

Inter-Governmental Agreements

To address situations where foreign law would prevent an FFI from complying with the terms of an FFI agreement, the United States Treasury Department has developed three model intergovernmental agreements (IGAs).

The Model 1 IGA requires FFIs in the foreign jurisdiction to report tax information about US account holders directly to the government, which will in turn relay that information to the IRS.

The Model 1A IGA is essentially the same, except that the IRS will reciprocate with similar information about account holders from the signatory country with the partner government.

The Model 2 IGA requires FFIs to report specified information about their US accounts directly to the IRS, to the extent that the account holder consents or such reporting is otherwise legally permitted, and such direct reporting is supplemented by information exchange between governments with respect to non-consenting accounts. FFIs also report to the IRS aggregate information with respect to holders of pre-existing accounts who do not consent to have their account information reported, on the basis of which the IRS may make a "group request" to the partner jurisdiction for more specific information.

As of March 29, 2017, 113 jurisdictions had signed either signed an IGA with the US Treasury, or had an Agreement in Substance in place.

FATCA Requirements For Individuals

In practical terms, FATCA adds yet another reporting burden on those with interests in foreign accounts; FATCA reporting is in, addition to other foreign financial reporting requirements, including the Report of Foreign Bank and Financial Accounts (FBAR).

Under FATCA, US citizens, US individual residents, and certain non-resident individuals who own certain foreign financial accounts or other offshore assets (specified foreign financial assets) must report those assets on new Form 8938 ‘Statement of Specified Foreign Financial Assets', which must be attached to the annual US income tax return (Form 1040).

Individuals who do not have to file an income tax return for the tax year do not need to file Form 8938, even if the value of their specified foreign assets is more than the appropriate reporting threshold (specified below). Those required to file Form 8938 do not have to report financial accounts maintained by: a US payer (such as a US domestic financial institution); the foreign branch of a US financial institution, or; the US branch of a foreign financial institution.

For individuals who are resident in the United States, if the total value of the specified foreign assets is at or below USD50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than USD75,000 at any time during the tax year.

Higher asset thresholds apply to US taxpayers who file a joint tax return or who reside abroad. Married taxpayers filing a joint income tax return and living in the US must report if the total value of their specified foreign financial assets is more than USD100,000 on the last day of the tax year or more than USD150,000 at any time during the tax year. Married taxpayers filing separate income tax returns and living in the US must report if the total value of their specified foreign financial assets is more than USD50,000 on the last day of the tax year or more than USD75,000 at any time during the tax year.

US taxpayers living abroad must file Form 8938 if they file a return other than a joint return and the total value of specified foreign assets in the foreign account is more than USD200,000 on the last day of the tax year or more than USD300,000 at any time during the year. Non-resident taxpayers filing a joint return and with specified foreign assets of more than USD400,000 on the last day of the tax year or more than USD600,000 at any time during the year must also file Form 8938.

The IRS currently defines a taxpayer living abroad as: a US citizen whose tax home is in a foreign country and who is either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year; or a US citizen or resident, who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries at least 330 days.

The following types of foreign assets must be reported on Form 8938:

  • Financial (deposit and custodial) accounts held at foreign financial institutions
  • Foreign stock or securities not held in a financial account
  • Foreign partnership interests
  • Foreign mutual funds
  • Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust
  • Foreign-issued life insurance or annuity contract with a cash-value
  • Foreign hedge funds and foreign private equity funds

In addition to accounts held at foreign branches of US financial institutions and US branches of foreign institutions, the following assets are not reportable under FATCA:

  • Domestic mutual fund investing in foreign stocks and securities
  • Indirect interests in foreign financial assets through an entity
  • Foreign real estate held directly
  • Foreign real estate held through a foreign entity (although the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate)
  • Foreign currency held directly
  • Precious Metals held directly
  • Personal property, held directly, such as art, antiques, jewellery, cars and other collectibles
  • Social Security-type program benefits provided by a foreign government


Penalties for failure to report foreign financial assets on Form 8938 when required under the legislation are harsh. Non-disclosure may result in a penalty of USD10,000, and an additional fine of up to USD50,000 for continued failure after IRS notification. Furthermore, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent.

FATCA And Foreign Financial institutions

To avoid being withheld upon under FATCA, FFIs may register with the IRS and agree to report to the IRS certain information about their US accounts, including accounts of certain foreign entities with substantial U.S. owners. However, as mentioned above, FFIs that enter into an agreement with the IRS to report on their account holders may be required to withhold 30 percent on certain payments to foreign payees if such payees do not comply with FATCA.

FATCA regulations exempt some categories of FFIs from the requirement to register and report, including:

  • Most governmental entities
  • Most non-profit organizations
  • Certain small, local financial institutions
  • Certain retirement entities

Under FATCA, FFIs include, but are not limited to:

  • Depository institutions (for example, banks)
  • Custodial institutions (for example, mutual funds)
  • Investment entities (for example, hedge funds or private equity funds)
  • Certain types of insurance companies that have cash value products or annuities

Unless otherwise exempt, FFIs that do not both register and agree to report face a 30% withholding tax on certain U.S.-source payments made to them.

The IRS has developed the FATCA Registration Website to enable FFIs to register with the agency of the purposes of FATCA. FFIs using the registration portal receive a Global Intermediary Identification Number (GIIN) from the IRS, unless the FFI is treated as a Limited FFI. A list of registered and approved FFIs and their GIINs is published by the agency every month. 

FATCA – Here To Stay?

FATCA has been hailed by many as a new paradigm in international tax enforcement, with supporters arguing that the law makes it significantly harder for tax evaders to shirk their tax obligations by parking their income in foreign banks accounts.

FATCA has also inspired other international tax enforcement programs based on automatic exchange of financial account information, notably the OECD's Common Reporting Standard.

However, as indicated at the start of this feature, FATCA also has plenty of critics. Some say that the law is too heavy handed and crosses a privacy threshold by allowing the US Government to pry into the financial lives of US citizens. Others note its extraterritoriality, and have asked whether the US Treasury Department has the authority to negotiate and conclude FATCA IGAs with foreign jurisdictions under the United States constitution.

Furthermore, there are many, including members of the US Congress, who have pointed out that FATCA will be detrimental to investment in the US, has placed a large and unnecessary administrative burden on the global finance industry, and will result in the collection of relatively small amounts of additional taxation – the Treasury Department itself has projected annual revenues from FATCA of between USD700m and USD800m per year, which must be balanced against potentially tens of billions spent by FFIs and tax authorities preparing for the law.

One consequence of FATCA that is frequently referred to by its detractors is that FFI's appear to be dropping US clients like hot coals, anxious to avoid the additional tax compliance burden associated with the law, and the penalties that await those not following the requirements to the letter – both financially and reputationally.

As Nigel Green, founder and CEO of the deVere Group, observed earlier this year: "FATCA turns law-abiding, middle-class Americans living overseas, of [which] there are approximately eight million, into financial pariahs." He noted that "many US citizens cannot even now hold a bank account in their country of residence as foreign banks routinely feel Americans are too much trouble thanks to FATCA's onerous and costly rules."

There have been plenty of attempts, mainly by Republican members of Congress, to either repeal FATCA, or to strike the law down in the courts, to no avail. But, at a legislative level, such attempts lacked sufficient support during President Obama's tenure in the White House.

However, Green believes that the election of Donald Trump to the US presidency, and a Republican majority in Congress, has changed the legislative landscape considerably, referring to the pre-election 2016 Republican Platform that called for FATCA's repeal as a "warrantless seizure of personal financial information without reasonable suspicion or probable cause" and a threat to the "ability of overseas Americans to lead normal lives."

While President Trump has remained silent on the issue of FATCA, an attempt to repeal the law as part of a comprehensive tax reform bill, which is expected to be introduced later this year, cannot be ruled out. However, such a move is also likely to be opposed strongly by many in Congress, especially as repealing FATCA may be seen as a measure which lets wealthy tax evaders off the hook. What's more, the development of the CRS would seem to suggest that FATCA-style information exchange programs are here to stay in one form or another.


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