The Foreign Account Compliance Act (“FATCA”) has been introduced by the US to ensure that all of its citizens, whether they live in the US or elsewhere, fully disclose their worldwide assets and pay the US taxes which are due. With international assistance, and more than 70 countries have now signed up to FATCA (including Russia and China), the legislation is in place.
FATCA requires those who manage investments to
identify whether they have any US account holders;
record details of sums paid to or for a US person, regardless of where in the world the payment is made, which are then passed to the IRS ; and to
deduct 30% withholding tax on payments of US source income and gains to non-compliant accountholders.
The major impact of FATCA has fallen on banks and other large financial institutions. However, the legislation is so widely drawn that some trusts and family offices will be affected whether or not they have any connection with the US.
FATCA identifies two types of entity:
Foreign Financial Institutions (“FFIs”) – which includes banks, investment managers and other entities which hold, manage or administer money or financial assets; and
Non-financial Foreign Entities (“NFFEs”) – which includes all entities which are not FFIs. There are two categories of NFFE, “Active” NFFEs (such as trading businesses) and “Passive” NFFEs.
Whereas FFIs are subject to potential reporting obligations, NFFEs merely need to identify whether they have any US owners.
Trustees will be FFIs if they are entities and in business (ie professional trust companies which charge for their services).
Trusts will be FFIS if they hold a majority of financial assets (such as stocks and shares and other financial instruments) and the assets are managed by a financial institution. Therefore, a family trust with a modest investment portfolio which is managed on a discretionary basis may find that it has reporting obligations under FATCA.
Similarly, a family office which manages or administers financial assets on behalf of others will be a FFI subject to FATCA reporting.
A FFI will need to register with the IRS and obtain a global intermediaries identification number (“GIIN”). Fortunately, the IRS is processing registrations within a few days and it has recently stated that registration applications received by 22 December 2014 will be processed in advance of the deadline on 1st January 2015. It is important to meet the registration deadline in order to avoid withholding obligations.
FATCA cannot be ignored. We are dealing with the FATCA issues for those trusts where we are the tax advisers and would be pleased to assist as required.