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FACT'D off with FATCA

How the US Foreign Account Tax compliance Act (FATCA) might impact your clients in 2013.

The US Foreign Account Tax Compliance Act (FATCA) has been simmering away for some time now with many hoping that it would run out of steam, or rather support, before its intended implementation on 1 January 2013.

However, with less than a year to go before we are all expected to enter into an agreement to disclose ‘US Persons**’ to the US Internal Revenue Service (IRS), I would say that at best we may see a further delay but the likelihood is that the deadline to ‘sign up’ of 1 July 2013 is here to stay.

For anyone that is still blissfully unaware of its existence, FATCA broadly requires all Foreign Financial Institutions (FFIs) to enter into an agreement with the IRS to:

  • Identify all clients (both existing and new) who are US persons, and report their details to the IRS
  • Withhold tax on any US sourced investment income or capital payment at a rate of 30%, or end the relationship where a client file shows US Indicia*, and the client refuses to confirm that they are not a US person (“recalcitrant” client), and
  • Withhold tax on payments to FFIs who have not elected to comply (i.e. when liquidating US assets).

An FFI is any foreign 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 (including a futures or forward contract or option) in such securities, partnership interests or commodities.

Accordingly, the term financial institution is pretty wide and intended to catch most types of financial/fiduciary service organisations, most of which are either still completely in the dark as to what they have to do or are reluctant to do anything at all until such time as there is clear guidance.

Some organisations are of the opinion that by simply refusing to deal with US persons, they will be ‘off the hook’. However, the reality is that whilst you may be able to impose restrictions at new business stage, you can’t stop your clients from taking up residence in another country.

In addition to this, many FFIs will be part of a larger group of companies, some of which will have, and more importantly will want to retain, business relationships with US persons or institutions. Under the group affiliation rules, all parts of the group have to sign up to FATCA for the group to be compliant and not be subject to withholding tax on any US assets they may have.

There has been some movement in this area as there is now a deferral on the application of withholding tax until 2016 where certain affiliates are unable to comply.

But, it really does seem very unlikely that any FFI is going to be able to categorically say that FATCA will not have some impact on their business.


Agreeing to report is one thing but the real thorn in the side for all FFIs is the amount of work that they will potentially have to undertake to capture or search for US Indicia* and how labour intensive this could become. Depending on the value of the account, this can range from an electronic record search only, to having to start trawling through paper files and archive boxes!

The general exemption is for accounts with a value of $50,000 or less. However, the IRS are listening to representations made by the insurance industry with the latest guidance indicating that only policies with a value of US$250,000 have to be disclosed.

The threshold of US$250,000 only applies to life insurance business at this point in time, but clarification is being sought as to whether Capital Redemption contracts are also included.

Are all Life Company products caught?

The guidance suggests that polices with no surrender value, such as term assurance policies, are definitely exempt from reporting. However, all investment linked policies are not. Essentially, anything that has a cash surrender value is likely to be caught.

Looking further afield, there are relaxations for certain pensions, but the definition of pension is not currently broad enough to exclude any pension arrangement outside of those corresponding to US scheme design. For example, no UK registered pensions, EU cross border pensions or QROPS would be out of scope under the current guidance.

As for the trust industry – well, let’s just say that it really isn’t a good place to be at the moment as there is still a great deal of ‘horse trading’ taking place due to the vagueness of the proposed legislation. I am sure that a favourable outcome would be to exempt simple structures which do little more than avoid probate in a foreign jurisdiction, with reporting only taking place on more complex arrangements where the Settlor is a US person or a payment is made to a US person.

The Life Assurance industry is also pressing for reporting on ‘money out’ events only.

What about data protection rules?

Like many jurisdictions around the world, FFIs in the Isle of Man are currently unable to comply with FATCA due to local data protection laws. Any FFI that disclosed client information would be in breach. Other jurisdictions are overcoming this problem by entering into an Intergovernmental agreement with the US Government and, as I understand it, that is something which the main offshore finance centres are also considering.

The signing of an Intergovernmental agreement would enable an FFI to disclose to their own government, who would in turn disclose to the US. The disclosure agreement is intended to be reciprocal and the jurisdiction would become a ‘FATCA Partner’.

Why do I keep referring to guidance?

Simply, because that is all we have to go on at the moment. The reality is that there is less than a year for FFIs to get their houses in order whilst continually having to deal with new draft legislation or amendments etc. One of the key difficulties with the guidance is that it has been written in such a way that it is very difficult for non-US organisations to understand.

Most of the world’s finance/fiduciary industry never expected FATCA to get this far and, as a result, have been very late in bringing their concerns to the attention of their local government or industry body and, in turn, to the IRS which is why the goal posts are continually moving.

What next?

FATCA is definitely going to happen and therefore, if you do have any US persons as clients, you may want to mention in passing that you hope they have been keeping on top of their ‘FBARS’*** as the world really is becoming a smaller place. If FATCA is successful, then other governments around the world may look at doing something similar.

Unfortunately, where Europe is concerned, a FATCA type arrangement may not be necessary. A revised version of the European Savings Tax Directive is gathering momentum and from a compliance point of view, this could make FATCA look like a walk in the park!


*US Indicia means: For existing accounts of individuals:

  • Existing identification of account holder as a US taxpayer (i.e. we already know they are US resident, citizen or green card holder);
  • US birthplace;
  • US address;
  • US phone number;
  • Standing instructions to transfer funds to US bank account;
  • A power of attorney or signatory authority granted to a person with a US address; or
  • Only address on file is US “in-care-of” or “hold mail” address.

For new accounts of individuals after 1 July 2013, it is all of the above plus “in-care-of” or “hold mail” address anywhere, although only if it is the sole address held for the individual.

**The term ‘United States person’ means:

  • A citizen or resident of the United States;
  • A domestic partnership;
  • A domestic corporation;
  • Any estate other than a foreign estate;
  • Any trust if:
    • A court within the United States is able to exercise primary supervision over the administration of the trust; and
    • One or more United States persons have the authority to control all substantial decisions of the trust.
  • Any other person that is not a foreign person.

*** Foreign bank account reporting