FACTA, the Foreign Account Tax Compliance Act was enacted in 2010, as a portion of the Hiring Incentives to Restore Employment. This act has been placed into service, to target non compliance by U.S. taxpayers using foreign accounts. It will now require foreign financial institutions to report information to the IRS for financial accounts held by U.S. taxpayers or by foreign entities in which the U.S. taxpayers hold a substantial ownership interest. FACTA is a result of an attempt to keep U.S. persons from hiding income and assets overseas.
Foreign financial institutions (FFI) may encounter material penalties pertaining to negligence in entering an agreement with the Internal Revenue Service. Following the agreement, the key step to effectively comply with FACTA, is the proficiency to align key departments such as operations, technology, risk, legal, and tax. An institution found to not be in compliance and possessing a “withholdable “payment would be subject to a 30% withholding tax on such payment, as a result of compliance failure with FACTA. An accountholder who does not provide the proper required documents to the foreign financial institution can also face penalties of 30%.
Adapting to the environmental and technological changes is crucial for compliance with FACTA. Upcoming important dates surrounding FACTA in 2014:
April 2013- August 2014 – FFI registration is open
June 2014 – IRS will post the first FFI listing
July 2014 – U.S. Withholding Agents, Participating FFIs, and Registered Deemed-Compliant FFIs are required to apply the new account onboarding procedures. FACTA withholding on certain accountholder types will begin. July 1, is the last date for obligations to be outstanding and qualify as grandfathered obligations exempt from FACTA withholding.
December 2014 – US Withholding Agents, Participating FFIs, and Registered Deemed-Compliant FFIs must document preexisting entity accounts identified as Prima Facie FFIs. If the FFI signed an agreement after July 1, 2014, the deadline is six months from the effective date of the FFI agreement.
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