1. Foreign Account Tax Compliance Act
FATCA or The Foreign Account Tax Compliance Act was passed as part of the Hiring Incentives to reinstate Employment (HIRE) Act on March 18, 2010. FATCA generates a new information reporting and withholding rule for expenses made to certain foreign financial organization and other foreign entities. The FATCA rules usually turn effective with certain payments made on or after January 1, 2014.
2. Aim of FATCA
FATCA is intended to boost transparency for the Internal Revenue Service (IRS) with respect to the people of U.S who may be investing and receiving income through non-U.S. institutions. While the main goal of FATCA is to get information about U.S. persons, the FATCA inflicts tax withholding where the valid documentation and reporting necessities are not met.
3. FATCA Impact
While FATCA impacts the U.S withholding agents and the U.S. multinational companies, the biggest impact will likely be to Foreign Financial Institutions (FFIs).
4. Requirements for withholding under the FATCA
A withholding agent needs to withhold 30% on a withholdable payment made against a Non-Financial Foreign Entity (NFFE) or Foreign Financial Institution (FFI), unless the FFI or NFFE meets certain criteria. Additionally an FFI must withhold 30% on any passthru payment it makes to a intractable account holder, and also to the payments it makes to another FFI until that FFI meets certain requirements.
5. Withholdable Payment
A withholdable payment is nothing but a payment of either: U.S. source income that is predetermined or determinable, annual or periodical (FDAP) income; or gross proceeds from the sale or other disposition (including redemption) of property that can create U.S. source interest or dividend income.
6. Objectives of FATCA
FATCA objectives include reporting of foreign financial assets; withholding is the cost of not reporting.