The Foreign Account Tax Compliance Act is part of the provisions in the Hiring Incentives to Restore Employment Act (HIRE), signed into law in March 2010 and scheduled to take effect on January 1, 2013. FATCA creates new information reporting and withholding regimes for payments made to certain foreign financial institutions and other foreign entities.

FATCA is intended to increase transparency for the IRS with respect to US person who invest and earn income through non US institutions. FATCA imposes a 30% withholding tax where the applicable documentation and reporting requirements are not met. The regime thus addresses perceived tax abuse by US persons through the use of offshore accounts.

FATCA withholding begins for fixed or determinable annual or periodical payments (FDAP) made from January 1, 2014 onwards.

FATCA can impact any person, US or Foreign, who is involved in making or receiving payments of US income source. This also applies to virtually all non US entities, directly or indirectly, receiving gross proceeds which produce interest or dividends.

Moreover, US entities that make payments of US source to non US persons will also be subject to the 30% withholding tax under FATCA. US entities are therefore obliged by law to maintain documentation of non US persons.

FATCA generally applies to two defined payment types

1. Withholdable Payments – any payments of interest, dividends, rent, wages, salaries, royalties and other FDAP such as gains, income and profits. Gross proceeds from the sale or disposition of US property of a type than can produce interest or dividends are also considered a withholdable payment, as well as interest paid by foreign branches of US banks.
2. Passthru Payments - payments that are attributable to payments that require withholding to withholdable payments. Participating FFIs may be required to withhold 30% of a passthru payment that is made to a noncompliant FFI or an account holder who has failed to verify its US or non US status, known as a recalcitrant account holder.

A US source payment is any income that arises within the US. The source of certain income, such as dividends and interest, is based on the residence of the payer, whilst the source of income from property is based on where the property is used.

Under FATCA, one is therefore required to report all world-wide income and proceeds received by US persons.

No, FATCA does not replace the existing US 30% withholding tax and reporting regimes.

An FFI is a foreign financial institution. That is, any non US entity that

1. Accepts deposits from banking or similar business
2. Holds financial assets for the account of others
3. Is engaged in the business of investing, reinvesting, or trades in securities or commodities.

Generally-speaking, a non US entity may be a bank, broker or dealer, insurance companies, hedge funds and private equity funds.

In order to comply with FATCA, an FFI will enter into an FFI Agreement with the US Treasury in order to determine which accounts are US accounts and conducts annual reporting of those accounts .

An FFI that enters into an FFI Agreement by June 30, 2013 will be identified as a participating FFT and this avoid FATCA withholding that will begin January 1, 2014.

As a US citizens or non US citizens involved with a US entity must seek professional financial advice ahead of FATCA that is scheduled to come into law in January 2013. A deVere Financial Adviser can advice a US client on their national or international investments and will then refer them to a US Tax attorney to make sure that their tax position is 100% compliant.

FATCA obliges jurisdiction to comply even if that country has entered into a double taxation treaty or exchange of information treaty with the US Government. In fact, the law states that individuals or entities must be compliant with FATCA in order for them or their clients to be entitled to the benefits of those treaties.

US status is determined there exists:

1. US citizenship or lawful permanent resident via Green Card status
2. US birthplace
3. US residence address or a US correspondence address
4. Standing instructions to transfer funds to an account maintained in the US or directions regularly received from a US address
5. In care of address or hold mail address that is the sole address of the client
6. A power of attorney or signatory authority granted to a person with a US address

NB. Having one of these indicia does not necessarily mean that the account is owned by a US person but must be given closer scrutiny.

Transferring money from someone on the US to someone in a foreign country will not trigger FATCA withholding. Nonetheless, money transfer into and income earned in a US account may be subject to FATCA reporting requirements.

A joint account that has one US owner is treated as a US account and the entire account is subject to reporting as US person.