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Have you been asked about FATCA by your bank or customers yet?
Many of our clients, both corporates and individuals, have been contacted by a financial institution that they deal with in connection with the Foreign Account Tax Compliance Act (FATCA). Some businesses have also found that customers are contacting them to obtain self-certification under FATCA. So what is FATCA and why might you be affected?
What is FATCA and who does it affect?
Tax avoidance is a hot topic for most governments and as a result more and more measures are being introduced to eliminate international tax avoidance. FATCA is one of these measures. It was introduced to improve tax compliance by US citizens or those defined as ‘US Persons for tax purposes’.
Whilst it is part of US legislation, the information exchange arrangements between the US and UK authorities mean that this is now also part of UK law. As such, it affects all UK entities which manage financial assets and accounts outside of the US including financial organisations, companies, professional practices and Trusts.
This legislation is primarily concerned with US taxes, but even if you have no links to the US, you may still need to complete the requested declaration. There is nothing to worry about and we can help if you receive a notice to certify your status and advise you how to complete the forms.
Why are we hearing so much about it now?
Whilst the information exchange arrangements have been in place since 2014, the reporting requirements only came into play in 2015, so many people are only just hearing about it now.
The legislation places an obligation on organisations it defines as ‘Financial Institutions’ (FIs) – which captures more organisations than you might expect – to register with the US’s Internal Revenue Service (IRS). They must also keep records of and inform the IRS when any sums are paid to or on behalf of a US person, regardless of where in the world the payment is made.
Additionally, the IRS must be assured that the FI has adequate systems in place to identify and record ‘US Persons’, which is why they ask clients to certify their own situation. This includes checking whether or not a client organisation is a financial institution.
In order for the FI to comply, you will be asked for your FATCA status with the usual anti-money laundering and client identification processes when dealing with institutions such as banks.
What do you need to do?
If you are asked to complete a declaration form under FATCA, you must comply. Failure to complete and return the form may result in you being prevented from opening or operating bank accounts, and will result in a deduction of withholding tax at 30% from any income from US sources.
You will need to be familiar with the requirements under FATCA. As the terminology used in the forms comes from the US, you may benefit from professional assistance to ensure you answer the questions correctly.
Completing the declaration for a UK entity or FI does not mean you will be reported to the IRS – that would only happen if the information you provide indicates that you have an obligation to account to the US for income received.
Determining your classification
We have seen an increased number of enquiries from our clients regarding their FATCA classification. For most stand-alone trading companies, classification is relatively straight-forward. Generally they are classified as a Non Financial Foreign Entity (NFFE) under HMRC guidance and as either ‘active’ or ‘passive’ – depending on the activities carried out and investments held.
However, classification can be more complex where holding companies exist or there are other complexities in the group structure.