FATCA Who is Affected: The US Government has just enacted the Foreign Account Tax Compliance Act (FATCA), which will be implemented beginning January 1, 2013. This was initiated by the US Department of Justice (DOJ) and the US Internal Revenue Service (IRS) to easily identify US persons that have been utilizing offshore accounts for the purpose to evade their taxes. Moreover, it is also prompted by several prosecutions involving large and well-known Swiss banks that were even publicized across the world. With this move, the US Government believes it will help combat offshore tax evasion and recover the much needed tax revenues to support its economy.

Date of Effectivity of FATCA


Technically speaking, payments made by US taxpayers after December 31, 2012 will already be affected by FATCA. This was agreed upon, even after legislation was approved long before the year 2010, to give FFIs and NFFEs to perform necessary changes with their information technology systems and internal procedures that will be in compliance with the requirements prescribed by this latest reporting and compliance regime.

Institutions that will be Affected by FATCA


FFIs and NFFEs that have US account holders, US proprietary investments, and US Financial dealings are most likely to be affected by FATCA. Legislation states that all payment that is classified as Withholding Payment is to be impacted by FACTA because it gives FFI the authority for these to act as its US withholding agent. Below is a list of some of these:


Entities that accepts deposits which includes

  1. building societies
  2. savings and loan associations
  3. commercial banks
  4. credit unions
  5. savings bank
  6. thrifts
  7. cooperative banking institutions


Entities that has substantial portion holding financial assets for another which includes

  1. clearing organizations
  2. broker-dealers
  3. custodial banks
  4. trust companies

Entities that are primarily engaged with investing, reinvesting, partnership, trading securities, or derivative interests which includes:

  1. hedge funds
  2. mutual funds
  3. venture capital
  4. private equity
  5. investment vehicles
  6. managed funds

The Impact of FATCA with Foreign Law Compliance


As stated in its rules, Recalcitrant Account Holders are to be collected a 30% US withholding tax on their Withholdable Payments. This may bring conflict with existing Foreign Law Compliance implemented by local government where these accounts are registered and held. If FATCA is to be strictly followed, it will require all FFIs to submit, verify and obtain information to the IRS for Recalcitrant Account Holders; however, local law may constraint this process due to certain local laws also upheld and implemented under its jurisdiction.

With this regard, Congress has been given the task to provide solution to this concern with the IRS. The Department has been prompted to draft proper guidelines on how to make this legislation workable without prejudice to the existing principles and laws followed by non-US entities without neither discouraging nor disrupting foreign investments to embark future business investments in the US. At present, the IRS is still in the process of gathering comments and suggestions concerning the proper implementation of this rule of law, particularly with the side of FFIs.

The Options Left for FFIs and NFFEs in relation to FATCA


FFIs and NFFEs have three options: to agree with these provisions and maintain the current tax rates they enjoy with the US, or to suffer a 30% withholding tax as consequence for non-compliance. In any case, the FATCA will win because it will be able to collect the needed funds for the government and it will have more information with regards to the proper tax payments that has to be submitted and made by eligible US tax residents. Otherwise, they may decide to cease operation with the US and go transfer elsewhere for a more beneficial tax rate regime. It then becomes a question of whether or not the US government could afford such a possibility of seeing most of its foreign investors seeking other countries as more friendly destinations for their business projects or is there any room for these investors to lose their current commercial relationship with the US in exchange for lower tax rates?

At present, many have already felt the impact created by FATCA. Most FFIs are either rejecting the offer to open new account under US Territory, while does who still welcome this offer very expensive rates in exchange for their services to set-up a new US account for interested parties. While the rest has decided to act simply as investment advisor for them to remain compliant with the local regulatory provisions of the country, where they operate yet maintain relationship with the US market.

A Closer Look at the Challenges Facing FFIs and the Implementation of FATCA


Adhering to the requirements of FATCA is a very challenging task. FFIs will need to design new protocols in addition to the existing anti-money laundering and know your customer procedures. It would be necessary for them to adopt new internal procedures and information technology approaches that will be in compliance with the IRS. Therefore, small FFIs may not have the capacity to assume the additional costs this would imply leaving only big FFIs to comply and proceed regular business transactions to interested entities.