Burdensome FATCA Reporting Requirements
The main FATCA requirement that is perceived to be onerous for offshore financial centers is the requirement that financial institutions must provide the IRS with reports on their U.S. account holders, or “withhold and pay over to the IRS 30-percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to (a) non-participating FFIs[1], (b) individual accountholders failing to provide sufficient information to determine whether or not they are a U.S. person, or (c) foreign entity accountholders failing to provide sufficient information about the identity of its substantial U.S. owners.” (See Summary of Key FATCA Provisions on IRS website.)
FATCA reporting has two models for compliance:
Model 1: The financial institutions report the information to the designated authority in the partner jurisdiction, who then shares it with the U.S. government. As originally designed, Model 1 was to be reciprocal, but this has not occurred in practice.
Model 2: The individual financial institutions enter into individual agreements with and report directly to the U.S. IRS.
If the procedures confirm that a financial account is a U.S. reportable account, the following information must be obtained:
Timeline for FATCA Compliance
The timeline for FATCA compliance started in January 2013 when the IRS began accepting Foreign Financial Institution (FFI) applications. Other key dates in the compliance timeline are:
The Effect of FATCA Requirements on International Business
The requirements are seen as creating so much additional record-keeping, expense and work for the financial institutions that many banking institutions in countries that are not as dependent on U.S. capital, such as France, are simply deciding to no longer do business with U.S. citizens. The smaller island nations do not have that prerogative and most have signed treaties where they agree to provide the necessary information. Well established jurisdictions, such as the Caymans, Bermuda and the BVI can afford the changes to modify their data collection, record-keeping and reporting systems. Other countries that are only recently trying to develop themselves as financial centers may have more difficulty managing the expense of these new requirements.
Despite the difficulties in complying with FATCA and other new requirements imposed by the European Union and the U.K., offshore financial centers provide many advantages for today’s large global companies. They allow the cross-border vehicles needed for multinational trade and investment and for the shipping and aviation industries. For this reason, centers like the Cayman Islands, BVI and Hong Kong are likely to remain vibrant and important to international business.
[1] Foreign Financial Institutions
[2] Taxpayer Identification Number
[3] A W-9 is an IRS form, also known as "Request for Taxpayer Identification Number and Certification", which is used by an individual defined as a "U.S. person" or a resident alien to verify his or her taxpayer identification number.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.