1. FATCA ­ Fat Cat Legislation ­ Key Requirements, Implications and Updates
Prepared by Bachir El Nakib
Former Consultant at Qatar Financial Centre Regulatory Authority
Head of Compliance – Industrial and Commercial Bank of China Doha (QFC) Branch
Fat Cat Legislation
FATCA (Foreign Account Tax Compliance Act) was passed as part of the HIRE ACT (Hiring
Incentives to Restore Employment Act) and signed into law on March 18, 2010. The stated purpose
was to stop tax haven abuse by U.S. citizens and is a reincarnation of the Levin Bill slipped through
by the Senate Tax Committee. It apparently was not closely coordinated with the Banking
Committee which has its own agenda in the Finance bill. Implementation regulations are being
drawn up by the Treasury Department which will have wide reaching impacts on the banking
community, and we now need to figure out what burdens and reporting requirements will fall on
the financial community here, as well as offshore. Some of the fallout has already begun as some
banks have ceased to provide estate planning, eliminated in‐house trust officers, and sold off
entities in trust jurisdictions. They are attending only to the larger clients and small trust clients are
being sold off the shelf products. U.S. Ex‐pats banking domestically are having their accounts closed,
or not being permitted to open accounts, since they do not have a U.S. address and some are even
giving up their citizenship as a result, let alone the tax hassle they are experiencing.
The tax writing staff of Treasury is looking at adding to current rules rather than writing all new
regulations where they can. Big questions remain as to whether U.S. banks and branches of foreign
banks are excluded from the 30 % withholding required in the law through these regulations. The
original legislation was vague on how the withholding was to be carried out. There appears to be
some parameters for exclusion on foreign banks. There is also discussion whether Non‐ U.S. citizen
tax evasion will be enforced as well. The tendency now is not to enforce. Please refer to our blog for
a summary of the legislation. The devil is in the details and let’s sees how the rules are written. We
do know that we are in a new world of transparency of assets and trusts, banks are refusing to take
new money, and for the near future don’t expect much help from your bank in offshore tax
structuring.
No doubt the coming implementation of FATCA Act is of interest for all banks and financial
institutions and compliance professionals to learn about potential implications and burdens cost as
well for the impact of non‐compliance on correspondent banking with US Banks, a complex
situation must admit, it’s not an easy task to compel with FATCA, taking into consideration national
jurisdictions laws and regulations, and why we are required by US Treasury Code Sections 1471
through 1474, to report and/or certify the ownership or be subject to the same 30 percent
withholding. This new reporting and withholding regime ultimately impact current account
opening processes, transaction processing systems and “know your customer” procedures utilized
by foreign banks?
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2. This will raise surely a lot of Q & A, and it's not an easy task for compliance officers, internal
auditors, qualified intermediaries, lawyers and practitioners.
Introduction to FATCA
The FATCA legislation is part of a global push against tax evasion that has caused unease among US
citizens overseas. UBS, the Swiss bank, paid $780 million in 2009 to settle criminal charges that it
helped Americans evade tax and handed over client details, of course, the IRS has sought to compel
enhanced transparency with foreign accounts, pushing institutions and governments to
reveal accounts owned by or for Americans. FATCA gives the IRS even more potent weapons, but
one of the question is at what price. When FATCA reporting commences in early 2012 the scrutiny
can be expected to be much higher. Not only is there the administrative nightmare for banks, but
there are reporting burdens on American businesses and residents abroad.
FATCA (Foreign Account Tax Compliance Act) or like they call it Fat Cat Legislation, is addressed
initially to entities or persons falling under the US Tax withholding purpose, which was passed as
an amendment to the HELP jobs bill which basically went unnoticed outside the banking
community. Its intention was that US taxpayers pay their taxes as owed and not use deposits, trusts
and other shelters to obscure their finances and evade their tax obligations under US law. It
imposes vast information reporting on financial institutions, requiring them to identify and disclose
US account holders or become subject to a 30 % US withholding tax with respect to any payment of
US source income and proceeds from the sale of equity or debt instruments.
U.S. holders of offshore bank accounts, along with their accountants and tax advisors, should be
aware of recently enacted changes in their reporting requirements. Under the HIRE Act signed by
President Obama on March 18, individuals are required to include certain information with their
tax returns beginning with the 2011 tax year.
U.S. holders of offshore bank accounts will soon be required to disclose additional information with
their tax returns. The Hiring Incentives to Restore Employment (”HIRE”) Act of 2010 subjects them
to increased penalties for failing to report foreign assets and investment information.
Assets Subject to Reporting
Any of the following assets may be subject to reporting if the value of all of the specified assets held
by the taxpayer is greater than $50,000:
1. Any financial account maintained by a foreign financial institution.
2. Unless regulations provide otherwise, this could include a bank account maintained with a
U.S. branch of a foreign financial institution, which remains to be clarified.
3. Investments with foreign private equity or hedge funds may need to be reported.
4. Stock or securities issued by a non‐U.S. person.
5. Any financial instrument or contract held for investment that has an issuer or counterparty
that is a non‐ U.S. person.
6. Any interest in a foreign entity.
7. Interest rate and other swap agreements, futures and forward contracts, and other
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3. 8. Derivatives to which a foreign entity is a party could be subject to reporting, regardless of
whether the instrument is considered to be a “foreign” instrument.
Specified Foreign Financial Assets
A U.S. individual must first identify all reportable assets in order to determine whether, and what,
information needs to be disclosed.
1. It is important to note the following points when identifying assets subject to disclosure:
Unless regulations provide otherwise, it appears that a U.S. bank account maintained with a
U.S. branch of a foreign financial institution would have to be reported on the new form.
This differs from the FBAR which reports only foreign accounts, regardless of whether the
financial institution which maintains the account is domestic or foreign.
2. The new form requires the reporting of all investments in foreign stock, securities, bonds,
partnership interests, and disregarded entities as well as bank accounts, mutual funds and
the like. This would be in addition to disclosure already required for ownership of stock of a
foreign corporation (Form 5471), a foreign partnership (Form 8865) or a foreign
disregarded entity (Form 8858).
3. The reference to financial instruments or contracts would presumably include interest rate
and other swap agreements, futures and forward contracts, and other derivatives to which a
foreign entity is a party.
4. The term “financial institution” includes any entity that is engaged (or holds itself out to be
engaged) primarily in the business of investing, reinvesting or trading securities,
partnership interests, commodities or any interest (including futures or forward contracts)
in the preceding items.
5. A private equity fund or a hedge fund appears to qualify as a financial institution, and any
investment in a foreign private equity fund or hedge fund may have to be reported on the
new form.
6. It should be noted that, based upon recently released proposed changes to the FBAR,
investments in foreign private equity funds or hedge funds would not need to be reported
on that form. It remains to be seen whether the FBAR regulations will be revised in light of
the treatment of private equity and hedge funds under the HIRE Act.
7. Unlike the FBAR, the new form does not have a “look‐through” rule under which the
individual is considered to have a financial interest in financial accounts held by controlled
foreign corporations, partnerships or trusts that would require those indirect financial
interests to be disclosed.
8. The new form is a tax form, unlike the FBAR, and is subject to the non‐disclosure rules
applicable to tax returns and tax forms. In comparison, the FBAR may be shared by the
Treasury Department with other governmental departments.
Penalties
Failing to provide the required information could subject an individual to severe penalties. Any of
the following penalties would be in addition to penalties that could be imposed on the individual
with respect to any FBAR failures.
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4. 1. $10,000 for each year that the required information is not provided on a timely
filed tax return, with additional $10,000 penalties imposed if the failure is not
cured within a certain period of time after the IRS provides notice of the failure.
The penalty will not exceed $50,000 for any one failure.
2. A penalty will not be imposed if the failure is shown to be due to reasonable cause.
3. A 40% accuracy‐related penalty would apply to understatements attributable to
undisclosed foreign financial assets.
4. Undisclosed foreign financial assets for these purposes would include assets
required to be disclosed under sections 6038, 6038B, 6046A and 6048. The failure
to disclose these assets is already subject to significant penalties under those
provisions.
Statute of Limitations
The HIRE Act extends the statute of limitations from 3 years to 6 years in cases where the income
omitted from the taxpayer’s U.S. tax return exceeds $5,000 and the omission is with respect to
assets that were subject to the new reporting requirements. This differs from the typical 6‐year
statute extension which applies where there has been a 25% or greater understatement of gross
income. Although the reporting requirements are not effective until the 2011 tax year, the ability to
extend the statute of limitations to 6 years could be applied to income tax returns due after March
18, 2010, or for tax returns filed on or before March 18, 2010, if the statute of limitations has not
yet expired. This means that income tax returns for calendar year tax payers filed for the 2006,
2007, 2008, 2009 and 2010 tax years are potentially subject to the new 6‐year statute rather than
the traditional 3‐year statute, unless the IRS or Congress clarify how the statute extension is
supposed to apply.
In preparation for the 2013 compliance requirements, there are a few high‐level steps foreign
financial institutions should take:
1. Evaluate business impact of FATCA.
1. Identify availability and accuracy of customer data (including current KYC and account opening
process), and centralize to the degree possible within operations.
1. Identify and implement technology requirements for reporting.
1. Examine accounts for FATCA requirements:
a. Designate accounts based on FATCA requirements:
i. Pre‐existing individual accounts
ii. Pre‐existing entity accounts
iii. New individual accounts
iv. New entity accounts
b. Identify accounts that fall under the exemptions.
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5. c. Review documentary evidence for non‐exempt accounts to determine US status.
d. Establish procedures for re‐evaluation of non‐US status accounts.
1. Conduct role‐based training on FATCA for key stakeholders, FATCA project team members and
awareness for all staff.
FATCA: A new disclosure and withholding regime:
Under the newly proposed U.S. Treasury Code Sections 1471 through 1474, effective for payments
after December 31, 2012, all Foreign Financial Institutions (FFIs) will be required to enter into
disclosure compliance agreements with the U.S. Treasury, and all non‐financial foreign entities
(NFFEs) must report and/or certify their ownership or be subject to the same 30 percent
withholding. This new reporting and withholding regime will ultimately impact current account
opening processes, transaction processing systems and “know your customer” procedures utilized
by foreign banks. Chief compliance officers, tax reporting heads and other key players within your
organization will need to evaluate the potential impact of these regulations and develop a plan for
managing and remediating any potential risk associated with Foreign Account Tax Compliance Act
(FATCA) non‐compliance.
Relevance and Impact
The legislative intent of FATCA is to ensure there is no gap in the ability of the U.S. government to
determine the ownership of U.S. assets in foreign accounts. As such, this revenue raising provision,
which was originally enacted as a part of the Hiring Incentives to Restore Employment (HIRE) Act
(Pub. L. No. 111‐147), is expected to significantly impact the systems and operations of both U.S.
and non‐U.S. companies. While the regulations have not been finalized to date, companies will likely
need to make modifications to their internal systems, control frameworks, processes and
procedures for timely compliance with these regulations on or before their effective date of January
1, 2013.
FATCA Key Dates
Review and stay on top of FATCA legislation and milestones.
Key Date Action
March 18, 2010 Hire Act passed including FATCA provisions. New rules
became applicable to foreign securities lending transactions
where the purpose is tax reduction or elimination.
August 27, 2010 Notice 2010‐60 issued, provided initial guidance and some
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6. relief, but also a lot of questions.
November 1, Comments on Notice 2010‐60 due
2010
April 8, 2011 Notice 2011‐34 issued, providing further guidance on
documentation of pre‐existing accounts, pass‐thru
payments and reporting requirements.
June 7, 2011 Comments on Notice 2011‐34 due
August 8, 2011 Notice 2011‐34 ‐ Transitional relief for FATCA withholding
on payments to FFIs
December 31, Expect proposed FATCA regulations including draft FFI
2011 Agreement
January 1, 2013 Effective date of FATCA legislation
July 1, 2013 FFI Agreements executed prior to 6‐30‐2013 will have a 7‐
1‐2013 effective date and will be ensured to have the
assigned FFI number published in time to prevent FATCA
FFI withholding on 1‐1‐2014 (unless otherwise elected).
January 1, 2014 FATCA withholding on payments to FFIs and NFFEs begins
on Withholdable Payments of FDAP.
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7. January 1, 2015 FATCA withholding on payments to FFIs and NFFEs:
Withholdable Payments of FDAP and gross proceeds.
Pass‐thru Payments will become subject to FATCA
withholding not before 1‐1‐2015.
Conclusion
All individuals should determine whether the reporting requirements apply in any transaction or
investment of theirs in which a non‐U.S. person is a party. The HIRE Act provides another tool for
the IRS in their effort to identify unreported foreign financial assets. However, it requires disclosure
of assets and information that individuals who are familiar with FBAR requirements will not be
expecting. Because the reporting and filing requirements differ from the FBAR requirements,
individuals who are familiar with FBAR reporting should review their other investments to
determine whether additional reporting is required under the new rules.
U.S. individuals with offshore accounts and those who have engaged in financial transactions with
non‐U.S. persons should consult carefully with their tax accountants when preparing their tax
returns to ensure that they comply with the new requirements. The reporting of foreign financial
accounts and information has been an area of increased scrutiny by the IRS in recent years and this
focus will only continue with the new reporting requirements.
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