FATCA (Foreign Account Tax Compliance Act) was enacted in 2010 by the US Congress to target non-compliance by U.S. taxpayers using foreign accounts.
The provisions known as FATCA (included in the Hiring Incentives to Restore Employment Act) became law in March 18, 2010.
FATCA adds a new chapter to the Internal Revenue Code (Chapter 4) aimed at addressing perceived tax abuse by U.S. persons through the use of offshore accounts.
FATCA targets tax non-compliance by U.S. taxpayers with foreign accounts.
FATCA focuses on reporting:
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By U.S. taxpayers about certain foreign financial accounts and offshore assets.
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By Foreign Financial Institutions about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest.
The objective of FATCA is the reporting of foreign financial assets; withholding is the cost of not reporting.
FATCA will be gradually deployed according to a timetable as follows:
1- July 1st, 2014: Foreign Financial Institutions will be requested to capture sufficient information on their new individual clients to determine such clients’ FATCA status.
2- July 1st, 2014: Foreign Financial Institutions will be requested to withhold 30% on “withholdable Payments” made to clients who do not cooperate with the bank to determine their FATCA status.
3- July 1st, 2014: Foreign Financial Institutions will be requested to start updating their existing clients’ files to determine such clients’ FATCA status.
4- January 1st, 2015: Foreign Financial Institutions will be requested to capture sufficient information on their new entity clients to determine such clients’ FATCA status.
5- March 31st, 2015: Foreign Financial Institutions will be requested to report their US accounts to the IRS.
Classification of Taxpayers for U.S. Tax Purposes
U.S. law treats U.S. persons and foreign persons differently for tax purposes. Therefore, it is important to be able to distinguish between these two types of taxpayers:
United States Persons
The term ''United States person'' means:
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A citizen or resident of the United States
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A domestic partnership
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A domestic corporation
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Any estate other than a foreign estate
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Any trust if:
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A court within the United States is able to exercise primary supervision over the administration of the trust, and
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One or more United States persons have the authority to control all substantial decisions of the trus
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Any other person that is not a foreign person.
Foreign Persons
A foreign person includes:
Generally, the U.S. branch of a foreign corporation or partnership is treated as a foreign person. Refer to Internal Revenue Code section 7701(a)(31) for the definition of a foreign estate and a foreign trust.
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U.S. citizens, U.S. individual residents, and a very limited number of nonresident individuals who own certain foreign financial accounts or other offshore assets (specified foreign financial assets) must report those assets.
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Use Form 8938 to report these assets (attach Form 8938 to the annual income tax return (usually Form 1040).
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Taxpayers with a total value of specified foreign financial assets below a certain threshold do not have to file Form 8938.
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If the total value is at or below $50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $75,000 at any time during the tax year.
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The threshold is higher for individuals who live outside the United States.
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Thresholds are different for married and single taxpayers.
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Taxpayers who do not have to file an income tax return for the tax year do not have to file Form 8938, regardless of the value of their specified foreign financial assets.
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Penalties apply for failure to file accurately.
Alert: The reporting requirement for Form 8938 is separate from the reporting requirement for the FinCen Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”) (formerly TD F 90-22.1). An individual may have to file both forms and separate penalties may apply for failure to file each form. See the Comparison of filing requirements for further information.
Application to domestic entities: The IRS anticipates issuing regulations that will require a domestic entity to file Form 8938 if the entity is formed or used to hold specified foreign financial assets and the total asset value exceeds the appropriate reporting threshold. Until the IRS issues such regulations, only individuals must file Form 8938.
You are considered a resident alien if you meet one of the following two tests for the calendar year:
The first test is the "green card test." If at any time during the calendar year you were a lawful permanent resident of the United States according to the immigration laws, and this status has not been rescinded or administratively or judicially determined to have been abandoned, you are considered to have met the green card test.
The second test is the "substantial presence test." For the purposes of this test, the term United States includes the following areas:
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All 50 states and the District of Columbia,
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The territorial waters of the United States, and
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The seabed and subsoil of those submarine areas that are adjacent to U.S. territorial waters and over which the United States has exclusive rights under international law to explore and exploit natural resources
The term does not include U.S. possessions and territories or U.S. airspace.
To meet the substantial presence test, you must have been physically present in the United States on at least:
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31 days during the current year, and
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183 days during the 3 year period that includes the current year and the 2 years immediately before. To satisfy the 183 days requirement, count:
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All of the days you were present in the current year, and
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One-third of the days you were present in the first year before the current year, and
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One-sixth of the days you were present in the second year before the current year.
Do not count the following days of presence in the United States for the substantial presence test:
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Days you commute to work in the United States from a residence in Canada or Mexico if you regularly commute from Canada or Mexico. You are considered to commute regularly if you commute to work in the United States on more than 75% of the workdays during your working period.
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Days you are in the United States for less than 24 hours when you are in transit between two places outside the United States.
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Days you are in the United States as a crew member of a foreign vessel engaged in transportation between the United States and a foreign country or a U.S. possession. However, this exception does not apply if you otherwise engage in any trade or business in the United States on those days.
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Days you intended to leave, but could not leave the United States because of a medical condition or problem that arose while you were in the United States. Whether you intended to leave the United States on a particular day is determined based on all the facts and circumstances.
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Days you are an exempt individual.
An exempt individual may be anyone in the following categories:
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An individual temporarily present in the United States as a foreign government-related individual;
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A teacher or trainee temporarily present in the United States with a J or Q visa who substantially complies with the requirements of the visa;
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A student temporarily present in the United States with an F, J, M, or Q visa who substantially complies with the requirements of the visa; or
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A professional athlete temporarily present to compete in a charitable sports event
Even if you meet the substantial presence test, you can be treated as a nonresident alien if you are present in the United States for fewer than 183 days during the current calendar year, you maintain a tax home in a foreign country during the year, and you have a closer connection to that country than to the United States. This does not apply if you have applied for status as a lawful permanent resident of the United States, or you have an application pending for adjustment of status. Sometimes, a tax treaty between the United States and another country will provide special rules for determining residency for purposes of the treaty. An alien whose status changes during the year from resident to nonresident, or vice versa, generally has a dual status for that year, and is taxed on the income for the two periods under the provisions of the law that apply to each period.
Types of foreign assets and whether they are reportable on Form 8938
Financial (deposit and custodial) accounts held at foreign financial institutions.
Yes
Financial account held at a foreign branch of a U.S. financial institution.
No
Financial account held at a U.S. branch of a foreign financial institution.
No
Foreign financial account or asset for which you have signature authority.
No,unless any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset are or would be required to be reported, included, or otherwise reflected on your income tax return
Foreign stock or securities held in a financial account at a foreign financial institution
The account itself is subject to reporting, but the contents of the account do not have to be separately reported.
Foreign stock or securities not held in a financial account.
Yes
Foreign partnership interests.
Yes
Indirect interests in foreign financial assets through an entity.
No
Foreign mutual funds.
Yes
Domestic mutual fund investing in foreign stocks and securities.
No
Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor.
Yes,as to both foreign accounts and foreign non-account investment assets
Foreign-issued life insurance or annuity contract with a cash-value.
Yes
Foreign hedge funds and foreign private equity funds.
Yes
Foreign real estate held directly.
No
Foreign real estate held through a foreign entity.
No,but 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.
No
Precious Metals held directly.
No
Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles.
No
‘Social Security’- type program benefits provided by a foreign government.
No
