FATCA (Foreign Account Tax Compliance Act of 2009) could be one of the final nails in the coffin for offshore banks referred to as foreign financial institutions or FFIs. When I first heard about FATCA after it was passed in March of 2010 I didn’t pay much attention. After all the Swiss banks or other offshore bank accounts to the attention of the IRS.
In its simplest terms FATCA requires a 30 percent withholding tax on any “withholdable payment” made either to an FFI (e.g. an offshore bank) or certain other entities if it fails to comply with new reporting, disclosure, and related requirements. “Withholdable payment” includes U.S. source interest, dividends, rents, salaries, wages, premiums, annuities, compensation, as well as any gross proceeds from the sale or other disposition of property that can produce U.S. source interest or dividends.
Under the new requirements which are effective January 1, 2013 the 30% withholding applies unless the FFI enters into an agreement with the IRS to:
• Obtain information from each account holder as is necessary to determine which accounts are “U.S. accounts”;
• Comply with verification and due diligence procedures (to be prescribed by the Secretary) with respect to the identification of U.S. accounts;
• Report annually certain information related to any U.S. account maintained by such institution;
• Deduct and withhold 30 percent on certain pass thru payments5 made to the benefit of an account holder that refuses to provide the required information (a “recalcitrant account holder”);
Attempt to obtain a waiver in any case in which any foreign law would (but for a waiver) prevent reporting of information under the provision related to any U.S. account maintained by such institution and, if a waiver is not obtained, to close the account.
Under the agreement the offshore financial institution will provide:
• The name, address and taxpayer identification number (“TIN”) of each account holder that is a specified U.S. person;
• The name, address and TIN of each substantial U.S. owner of any account holder that is a U.S. owned foreign entity;
• The account number;
• The account balance or value (as specified by the Secretary); and
• The gross receipts and gross withdrawals or payments from the account (as specified by the Secretary).
Alternatively the offshore bank could file Forms 1099 with the IRS. In any event more U.S. holders of foreign bank accounts will become known to the IRS in the near future. For more about how and why stay tuned for FACTA Impacts Offshore Bank Accounts (Part II).