What is FATCA?

FATCA stands for the Foreign Account Tax Compliance Act. It colloquially refers to provisions included in the Hiring Incentives to Restore Employment Act signed into law on March 18, 2010 and effective January 1, 2013 (although, as explained in more detail below, withholding does not start at the earliest until January 1, 2014). It 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. The new rules require foreign financial institutions (FFI’s) to provide the Internal Revenue Service (IRS) with information on certain U.S. persons invested in accounts outside of the U.S. and for certain non-U.S. entities to provide information about any U.S. owners.

When is withholding going to start?

FATCA withholding begins for fixed or determinable annual or periodical (FDAP) payments made on or after January 1, 2014. FATCA withholding for FDAP and gross proceeds will begin January 1, 2015. Passthru payments will become subject to FATCA withholding no earlier than January 1, 2015. 

Relevance and impact

Any entity making a payment of U.S. source income must consider whether it is subject to FATCA. FATCA may apply to both financial and non-financial operating companies. Due to this breadth, FATCA impacts virtually all non-U.S. entities, directly or indirectly, receiving most types of U.S. source income, including gross proceeds from the sale or disposition of U.S. property which can produce interest or dividends. U.S. entities, both financial and non-financial, that make payments of most types of U.S. source income to non-U.S. persons will also be impacted as they may now be required to withhold a 30% tax on that income paid to a non-U.S. person under FATCA. This will require the U.S. entities to maintain documentation on those non-U.S. persons and also track how those persons are classified under FATCA.

What is an FFI?

An FFI is a foreign financial institution, which is any non-U.S. entity that:

• Accepts deposits in the ordinary course of a banking or similar business,
• As a substantial portion of its business, holds financial assets for the account of others, or
• Is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest in such securities, partnership interests, or commodities.

Generally non-U.S. entities such as banks, broker/dealers, insurance companies, hedge funds, securitization vehicles, and private equity funds will be considered FFIs. There is currently no de minimis threshold for investment vehicles and insurance companies.

How Deloitte can assist you?

Deloitte Azerbaijan’s tax professionals who know the intricacies of tax law as well as local jurisdictions, rules and regulations offer you assistance in FATCA services.