What is FATCA?

Foreign Accounts Tax Compliance Act is the law that requires American citizens to provide details of their financial accounts outside the U.S. to the IRS. The legislation was published in 2010. The law aims to prevent U.S. taxpayers from avoiding US-based taxation on real or legal persons' income and to establish a transparent, traceable tax system.

The purpose of FATCA is to determine the financial accounts of taxpayers residing in the USA outside the USA. The scope of FATCA is approximately 5.7 to 9 million U.S. citizens living outside the country. However, FATCA also includes family members or business partners who share accounts with people from the United States and have signatures on the accounts. It is not a U.S. citizen here.

This law is used to detect assets rather than income. There is no tax provision in the law. FATCA is used by government personnel to detect indicia of U.S. persons and their assets and to enable cross-checking where assets have been self-reported by individuals to the IRS or the Financial Crimes Enforcement Network (FinCEN).

U.S. citizens, regardless of their residence, are required to report their assets annually to FinCEN. Under U.S. tax law, U.S. citizens (irrespective of their country of residence) are generally required to report and pay U.S. federal income tax on income from all sources.


FATCA Indicia

Banks operating under the law will search according to FATCA indicators, including;

  • A birthplace in the USA
  • Identity of the account holder
  • U.S. domicile or postal address
  • U.S. phone number
  • Permanent instructions to pay amounts from a foreign (i.e., non-US) account to an account held in the United States. 


What exactly needs to be reported for FATCA?

The hardest part of FATCA is what needs to be reported. Which assets to report is one of the most confusing issues. The assets to be specified by the IRS are as follows;

  • Foreign pensions
  • Foreign stockholdings
  • Foreign partnership interests
  • Foreign financial accounts
  • Foreign mutual funds
  • Foreign issued life insurance
  • Foreign hedge funds
  • Foreign real estate held through a foreign entity
  • Your foreign home does not need to be reported.


What Are The Implications For Non-Compliance?

Foreign Financial Institutions that do not enter a legally binding agreement with the IRS to make the appropriate disclosures about their U.S. clients face a 30% rate of withholding tax on all related payments received. For investors, that may mean 30% of all deposits, dividend or interest payments are withheld. There are also penalties for failure to report correctly. For individuals, reporting on non-US financial accounts for amounts over $10,000 is done by way of an FBAR form.


FATCA For Financial Institutions

Financial institutions have to comply with FATCA rules. FATCA requires various penalties and sanctions on financial institutions that do not comply with regulations. FATCA compliance involves time and cost for companies. Some financial institutions have published that they have spent millions of dollars to ensure FATCA compliance.

With Sanction Scanner, you can support your company's FATCA compliance process. Please contact us for more information. 


You can check the Anti-Money Laundering (AML) Guide in the United States of America here



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