General introduction on FATCA By Dr. Zhan Hao and He Shan from AnJie Law Firm At present, most Chinese financial institutions are paying quite close attention to the ongoing process of Chinese participation in the implementation of FATCA. It is heard that the Chinese government has made its decision to sign the bilateral with the U.S. government. If this is true, Chinese financial institutions will undertake many more obligations. Some other countries have already signed this kind of treaty. FATCA is like a storm sweeping the whole world and will rewrite the financial order all over the world. At this moment, it is necessary to know that in general, FATCA has already become a buzzword in the financial area. Why is FATCA made? Unlike all other developed countries, the United States levies income taxes on its citizens, regardless of residency, and therefore requires Americans living abroad to pay U.S. taxes on foreign income 1. Under U.S. tax law, U.S. persons are generally required to report and pay taxes on income from all sources 2. However, if the taxpayer does not report, it is difficult for the U.S. government to learn about all of its citizens offshore income. It has been estimated that the U.S. Treasury loses as much as $100 billion annually to offshore tax non-compliance 3. Under these circumstances, the U.S. government determined new legislation to make taxpayers report their foreign financial assets. Under this new legislation if taxpayers do not report their financial assets, their income will be withheld. What is FATCA? 1 Fitz-Morris, James (November 25, 2013). "Canadian banks to be compelled to share clients' info with U.S.". CBC News. 2 ^ e.g., 26 U.S.C. 61, 6012 3 ^ Jump up to: a b 111 Cong. Rec. S1635-36 (daily ed. Mar 17, 2010) (statement of Sen. Levin) ("Right now, thousands of U.S. tax dodgers conceal billions of dollars in assets within secrecy-shrouded foreign banks, dodging taxes and penalizing those of us who pay the taxes we owe. The Permanent Subcommittee on Investigations... estimated that these tax-dodging schemes cost the Federal Treasury $100 billion a year.")
FATCA is short for the Foreign Account Tax Compliance Act which was released by the Internal Revenue Service (IRS) and became law in March 2010. It is a portion of the 2010 Hiring Incentives to Restore Employment (HIRE) Act. FATCA targets tax non-compliance by U.S. taxpayers with foreign accounts. Its main provisions are as follows: 1. For individuals: U.S. individual taxpayers must report information about certain foreign financial accounts and offshore assets on Form 8938 and attach it to their income tax return if the total asset value exceeds the appropriate reporting threshold. 2. For foreign financial institutions (FFIs): to avoid being withheld from, foreign financial institutions may register with the IRS and agree to report to the IRS certain information about their U.S. accounts, including accounts of certain foreign entities with substantial U.S. owners. FFIs that enter into an agreement with the IRS to report on their account holders may be required to withhold 30% on certain payments to foreign payees if such payees do not comply with FATCA. FFIs include, but are not limited to: Depository institutions (e.g., banks), Custodial institutions (e.g., mutual funds), Investment entities (e.g., hedge funds or private equity funds) and certain types of insurance companies that have cash value products or annuities. 4 How to implement FATCA? Once FATCA was released, the global financial community was in an uproar. Obviously, the U.S. could not force FFIs to undertake the above obligations just on the basis of its domestic law. As a result, FATCA is well known as an imparity clause for its violation of other countries sovereignty. In order to solve this, the U.S. government intends either to sign intergovernmental agreements (IGAs) with other governments or to sign agreements with FFIs to implement FATCA. 4 Information from IRS website (http://www.irs.gov/businesses/corporations/information-for-foreign-financial-institutions)
IGAS The U.S. government has prepared two models of the IGA for the other governments to choose from. Under Model 1 IGA, the partner jurisdiction agrees to report to the IRS specified information about the U.S. accounts maintained by all relevant FFIs located in Model 1 IGA jurisdiction. The exchange of information may be on a reciprocal or nonreciprocal basis. FFIs located in a Model 1 IGA jurisdiction (Reporting Model 1 FFIs) must register to obtain a global intermediary identification number (GIIN), but since they do not need to provide a GIIN to withholding agents until January 1, 2015, they have additional time to register. However, under Model 2 IGA, the partner jurisdiction agrees to direct and enable all relevant FFIs located in the jurisdiction to report specified information about their U.S. accounts directly to the IRS. FFIs located in a Model 2 IGA jurisdiction (Reporting Model 2 FFIs) must register with the IRS and agree to comply with the terms of an FFI agreement. FFI agreement An FFI that is located in a jurisdiction that is not treated as having an effect on IGA, to avoid being withheld from, to obtain registered deemed-compliant FFI status or to obtain a GIIN, must register and agree to comply with the terms of an FFI agreement, unless it is able to qualify as a certified deemed-compliant FFI or an exempt beneficial owner. When to implement FATCA? As of 1 July 2014, IGAs regarding the implementation of FATCA are as follows 5, however, most of them are still not effective: 5 Information from Wikipedia (http://en.wikipedia.org/wiki/foreign_account_tax_compliance_act)
Jurisdiction IGA Model Signature Effectiveness Australia 1 April 28, 2014 June 30, 2014 Austria 2 April 29, 2014 Belgium 1 April 23, 2014 Bermuda 2 December 19, 2013 British Virgin Islands 1 June 30, 2014 Canada 1 February 5, 2014 June 27, 2014 Cayman Islands 1 November 29, 2013 Chile 2 March 5, 2014 Costa Rica 1 November 26, 2013 Denmark 1 November 19, 2012 Estonia 1 April 11, 2014 Finland 1 March 5, 2014 France 1 November 14, 2013 Germany 1 May 31, 2013 Gibraltar 1 May 8, 2014 Guernsey 1 December 13, 2013 July 1, 2014 Honduras 1 March 31, 2014 Hungary 1 February 4, 2014 Ireland 1 January 23, 2013 Isle of Man 1 December 13, 2013 July 1, 2014 Israel 1 June 30, 2014 Italy 1 January 10, 2014 Jamaica 1 May 1, 2014
Japan 2 June 11, 2013 Jersey 1 December 13, 2013 Latvia 1 June 27, 2014 Liechtenstein 1 May 19, 2014 Luxembourg 1 March 28, 2014 Malta 1 December 16, 2013 Mauritius 1 December 27, 2013 Mexico 1 November 19, 2012 January 1, 2013 Netherlands 1 December 18, 2013 New Zealand 1 June 12, 2014 Norway 1 April 15, 2013 Slovenia 1 June 2, 2014 South Africa 1 June 9, 2014 Spain 1 May 14, 2013 Switzerland 2 February 14, 2013 June 2, 2014 United Kingdom 1 September 12, 2012 June 30, 2014