FATCA stands for the Foreign Account Tax Compliance Act, the US regime that pushes foreign financial institutions to report the accounts their US customers hold, and backs that push with a withholding tax on US source payments to institutions that stay outside it. It runs on two separate tracks that people routinely merge: a withholding and reporting regime aimed at institutions, and a filing duty aimed at individual taxpayers.
Treasury states the purpose in one line. FATCA was enacted in 2010 by Congress to target non-compliance by US taxpayers using foreign accounts, and it requires foreign financial institutions to report to the IRS information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest (US Department of the Treasury, Foreign Account Tax Compliance Act).
The institution track lives in chapter 4 of subtitle A of the Code, headed taxes to enforce reporting on certain foreign accounts, at 26 U.S.C. 1471 through 26 U.S.C. 1473. The individual track sits somewhere else entirely, in the information return provisions at 26 U.S.C. 6038D. A client can be caught by one and not the other.
The Charge, and the Condition Attached to It
Read the whole sentence, because the conditional clause inside it is the entire design. In the case of any withholdable payment to a foreign financial institution which does not meet the requirements of subsection (b), the withholding agent with respect to such payment shall deduct and withhold from such payment a tax equal to 30 percent of the amount of such payment (26 U.S.C. 1471(a)).
The charge is not a tax on foreign banks in the ordinary sense. It is a consequence of not meeting subsection (b), and it is collected by the US payer rather than by the foreign institution. The way out of it is compliance, which is why the regime spread without the United States taxing anybody outside its jurisdiction.
What the charge reaches is defined a few sections later, and it too carries a carve-out. Except as otherwise provided by the Secretary, the term withholdable payment means any payment of interest, including any original issue discount, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, if such payment is from sources within the United States, and any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States (26 U.S.C. 1473(1)(A)). Income effectively connected with a US business is outside it: the term shall not include any item of income which is taken into account under section 871(b)(1) or 882(a)(1) for the taxable year (26 U.S.C. 1473(1)(B)).
What an Institution Has to Agree To
Subsection (b) is a list, and every item on it is a condition. The requirements of this subsection are met with respect to any foreign financial institution if an agreement is in effect between such institution and the Secretary under which such institution agrees to obtain such information regarding each holder of each account maintained by such institution as is necessary to determine which, if any, of such accounts are United States accounts; to comply with such verification and due diligence procedures as the Secretary may require with respect to the identification of United States accounts; in the case of any United States account maintained by such institution, to report on an annual basis the information described in subsection (c) with respect to such account; to deduct and withhold a tax equal to 30 percent of any passthru payment which is made by such institution to a recalcitrant account holder or another foreign financial institution which does not meet the requirements of this subsection, and of the allocable portion of a passthru payment made to a foreign financial institution which has elected to be withheld upon instead; to comply with requests by the Secretary for additional information with respect to any United States account maintained by such institution; and, in any case in which any foreign law would, but for a waiver described in clause (i), prevent the reporting of any information referred to in that subsection or subsection (c), to attempt to obtain a valid and effective waiver of such law from each holder of such account, and, if a waiver described in clause (i) is not obtained from each such holder within a reasonable period of time, to close such account (26 U.S.C. 1471(b)(1)).
That last undertaking is the one worth reading twice, because it has two limbs and the second is not optional. Attempting to obtain the waiver is the first step. Closing the account is what the agreement requires when the attempt fails.
The agreement is also revocable. Any agreement entered into under this subsection may be terminated by the Secretary upon a determination by the Secretary that the foreign financial institution is out of compliance with such agreement (26 U.S.C. 1471(b)(1)).
In practice most institutions never sign the agreement the statute describes. Institutions are encouraged to either directly register with the IRS to comply with the FATCA regulations, and the FFI agreement if applicable, or comply with the FATCA Intergovernmental Agreements treated as in effect in their jurisdictions, and Treasury’s own table of agreements and understandings by jurisdiction records 113 total jurisdictions (US Department of the Treasury, Foreign Account Tax Compliance Act). That is why an institution can be FATCA compliant with no agreement in its own name.
Two routes inside the statute reach the same place without an agreement. A foreign financial institution may be treated by the Secretary as meeting the requirements of this subsection if such institution complies with such procedures as the Secretary may prescribe to ensure that such institution does not maintain United States accounts and meets such other requirements as the Secretary may prescribe with respect to accounts of other foreign financial institutions maintained by such institution, or if such institution is a member of a class of institutions with respect to which the Secretary has determined that the application of this section is not necessary to carry out the purposes of this section (26 U.S.C. 1471(b)(2)).
What Gets Reported on a United States Account
Four items, and the statute lists them as a closed set. The agreement described in subsection (b) shall require the foreign financial institution to report the name, address, and TIN of each account holder which is a specified United States person and, in the case of any account holder which is a United States owned foreign entity, the name, address, and TIN of each substantial United States owner of such entity; the account number; the account balance or value, determined at such time and in such manner as the Secretary may provide; and, except to the extent provided by the Secretary, the gross receipts and gross withdrawals or payments from the account, determined for such period and in such manner as the Secretary may provide (26 U.S.C. 1471(c)(1)).
An institution may elect out of the last two of those and report instead as a US institution would. In the case of a foreign financial institution which elects the application of this paragraph, subparagraphs (C) and (D) of paragraph (1) shall not apply, and the agreement shall require such institution to report such information with respect to each United States account as it would be required to report under sections 6041, 6042, 6045, and 6049 if such institution were a United States person and each holder of such account which is a specified United States person or United States owned foreign entity were a natural person and citizen of the United States (26 U.S.C. 1471(c)(2)).
The Definitions That Decide Who Is In
These are all written for the section rather than for general use. For purposes of this section, the term financial institution means, except as otherwise provided by the Secretary, any entity that accepts deposits in the ordinary course of a banking or similar business, that as a substantial portion of its business holds financial assets for the account of others, or that 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 in such securities, partnership interests, or commodities (26 U.S.C. 1471(d)(5)). The third limb is why investment funds and some holding structures land inside a regime most people describe as being about banks.
The foreign version is the same definition plus a place of organisation, with a carve-out. The term foreign financial institution means any financial institution which is a foreign entity, and, except as otherwise provided by the Secretary, such term shall not include a financial institution which is organized under the laws of any possession of the United States (26 U.S.C. 1471(d)(4)).
Financial account is broader than a bank account and narrower than it first looks. Except as otherwise provided by the Secretary, the term means, with respect to any financial institution, any depository account maintained by such financial institution, any custodial account maintained by such financial institution, and any equity or debt interest in such financial institution other than interests which are regularly traded on an established securities market (26 U.S.C. 1471(d)(2)). What sits inside such an account, rather than being the account, is taken up in financial assets.
A United States account is any financial account which is held by one or more specified United States persons or United States owned foreign entities (26 U.S.C. 1471(d)(1)(A)). One exception takes small individual deposit accounts out, and it has two conditions that both have to hold. Unless the foreign financial institution elects to not have that subparagraph apply, the term shall not include any depository account maintained by such financial institution if each holder of such account is a natural person and, with respect to each holder of such account, the aggregate value of all depository accounts held in whole or in part by such holder and maintained by the same financial institution which maintains such account does not exceed $50,000 (26 U.S.C. 1471(d)(1)(B)).
Specified United States person is a residual with a list of exclusions rather than a positive class. Except as otherwise provided by the Secretary, the term means any United States person other than a publicly traded corporation, a corporation in the same expanded affiliated group as one, an organization exempt from taxation under section 501(a) or an individual retirement plan, the United States or any wholly owned agency or instrumentality of it, a State or the District of Columbia or a possession or a political subdivision or a wholly owned agency or instrumentality of any of those, a bank as defined in section 581, a real estate investment trust, and a regulated investment company, among others (26 U.S.C. 1473(3)).
Ownership brings a foreign entity in at a low threshold. For purposes of the chapter, a substantial United States owner is any specified United States person which owns, directly or indirectly, more than 10 percent of the stock of a corporation by vote or value, or more than 10 percent of the profits interests or capital interests in a partnership, and, in the case of a trust, any specified United States person treated as an owner of any portion of such trust under subpart E of part I of subchapter J of chapter 1 and, to the extent provided by the Secretary in regulations or other guidance, any specified United States person which holds, directly or indirectly, more than 10 percent of the beneficial interests of such trust (26 U.S.C. 1473(2)(A)). For investment vehicles the threshold is not a threshold at all: in the case of any financial institution described in section 1471(d)(5)(C), those clauses are applied by substituting 0 percent for 10 percent (26 U.S.C. 1473(2)(B)).
The documentation an entity uses to tell a US payer which side of chapter 4 it is on is covered in Form W-8BEN-E.
The Individual Filing Is a Different Statute
This is where preparers meet FATCA, and it is not chapter 4. Any individual who, during any taxable year, holds any interest in a specified foreign financial asset shall attach to such person’s return of tax imposed by subtitle A for such taxable year the information described in subsection (c) with respect to each such asset if the aggregate value of all such assets exceeds $50,000, or such higher dollar amount as the Secretary may prescribe (26 U.S.C. 6038D(a)). The trailing clause is the reason the filing thresholds practitioners work from are larger than the figure in the statute, and the ones that apply by filing status and residence are set out in international tax services.
The asset definition borrows chapter 4’s plumbing and then reaches past it. For purposes of this section, the term specified foreign financial asset means any financial account as defined in section 1471(d)(2) maintained by a foreign financial institution as defined in section 1471(d)(4), and any of the following assets which are not held in an account maintained by a financial institution as defined in section 1471(d)(5): any stock or security issued by a person other than a United States person, any financial instrument or contract held for investment that has an issuer or counterparty which is other than a United States person, and any interest in a foreign entity (26 U.S.C. 6038D(b)). The second limb is the one that catches unhoused holdings, a share certificate in a drawer rather than a brokerage position.
The penalty runs in two stages. If any individual fails to furnish the information described in subsection (c) with respect to any taxable year at the time and in the manner described in subsection (a), such person shall pay a penalty of $10,000 (26 U.S.C. 6038D(d)(1)). If that failure continues for more than 90 days after the day on which the Secretary mails notice of such failure to the individual, such individual shall pay a further penalty of $10,000 for each 30-day period or fraction thereof during which the failure continues after the expiration of that 90-day period, and the penalty imposed under that paragraph with respect to any failure shall not exceed $50,000 (26 U.S.C. 6038D(d)(2)).
There is a reasonable cause exception, and its second sentence closes the argument clients reach for first. No penalty shall be imposed by this section on any failure which is shown to be due to reasonable cause and not due to willful neglect, and the fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer, or any other person, for disclosing the required information is not reasonable cause (26 U.S.C. 6038D(g)).
Common Questions
Chapter 4 was added by title V, section 501(a), of the public law enacted March 18, 2010, and the withholding did not begin then (26 U.S.C. 1471, source credit). Except as otherwise provided in that subsection, the amendments made by this section shall apply to payments made after December 31, 2012 (26 U.S.C. 1471, statutory notes). A grandfather ran alongside it: the amendments shall not require any amount to be deducted or withheld from any payment under any obligation outstanding on the date which is 2 years after the date of the enactment of that Act, or from the gross proceeds from any disposition of such an obligation (26 U.S.C. 1471, statutory notes). The individual filing duty started earlier, applying to taxable years beginning after the date of enactment (26 U.S.C. 6038D, statutory notes).
No, and they are not even in the same title of law. The FATCA filing described above is a Code provision attached to the income tax return, while the Report of Foreign Bank and Financial Accounts is a separate filing on a separate system with its own threshold, a distinction worked through in international tax services.
The chapter 4 withholding can still reach a US business that pays a foreign institution, because the duty to deduct and withhold sits on the withholding agent making the payment rather than on the recipient (26 U.S.C. 1471(a)). The individual filing duty does not, because it is keyed to holding an interest in a specified foreign financial asset (26 U.S.C. 6038D(a)).
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a block of its own foreign information return work through a trial task before anything client facing depends on it.
