FATCA for individuals

FATCA is a double edged sword. Most people familiar with the term will think of FATCA as something that banks and financial institutions have to worry about but in practice both individuals and financial institutions are impacted.

The generally stated aim of FATCA is to force foreign financial institutions (FFIs) to report to the IRS where US individuals beneficially own US assets via non-US accounts. This came out of well documented scandals that to this day are still triggering penalties on various non-US banks for aiding or US resident individuals to deliberately hold such assets outside of the US without the IRS being made aware of the income or gains. In order to enforce compliance the US introduced an obligation on the FFI, and their affiliated group of companies to identify all of their clients for US tax purposes, and to then register and advise the IRS of the income or gains in the account. The stick is that any entity that does not do so will then be subject to a 30% withholding tax obligation on US income and gain sources on all of their and affiliated group company clients. So foreign financial entities have a simple choice, to comply or not to invest in any US assets, or with anyone else who invests in US assets, as no one who is compliant will deal with anyone who is not.

Following on from that are all of the requests for confirmation of an individual’s status, or of the beneficial owners of any entities that invest, whether foreign partnerships, foreign companies, foreign trusts etc, using the W-9 form for US individuals and the W8-BEN form for non-US taxpayers. Or if that entity is also considered a FFI, as it then will have to do the reporting.

To make things a little easier for foreign law purposes the US has entered into a number of bi-lateral so called Intergovernmental Agreements (IGAs), which are simply exchange of information treaties that provide that the FFIs can share information with their own government who will in turn share with the IRS. Most of these agreements also require US institutions to report investments by foreign individuals in the US in the reverse way. Because of this requirement there are still legal challenges attempting to block the rules in the US. However as much of the rest of the world has already taken up theme under the OECD sponsored Common Reporting Standard (CRS), a multilateral sharing of information, it will likely be difficult for the US to stop a process which it began. To a revenue authority sunlight is the best disinfectant, so a small number of bad eggs has led to a true paradigm shift in the attitude of governments across the world.

A better way perhaps to think of this from a US perspective is that the US wants the same reports they get from US banks, companies etc on Form 1099 etc from the non-US financial institutions so that they can match to taxpayers tax returns.

The flip side of the same piece of law was to introduce an additional filing obligation of US taxpayers (excluding non-resident aliens), to report their interest in foreign financial assets, ie non-US investments and the income or gains that they generate. This Form the 8938 has been required for taxpayers above certain asset thresholds since 2011. Helpfully the foreign asset threshold for a US person living outside of the UK is significantly higher than for those living in the US. However it would still be unusual for a high net worth individual not to have to file the form.

The US/UK HNW team obviously have a lot of experience in preparing the Form 8938s as part of an individual’s annual tax compliance, but also working with the firms greater FATCA practice in assisting clients to complete the US identification forms (W9 and the W8 Series) and consider the FATCA status of any entities that they create or participate in.

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