The primary entities required to report under the Foreign Account Tax Compliance Act (FATCA) are Foreign Financial Institutions (FFIs).
FATCA aims to prevent U.S. taxpayers from using foreign financial institutions to evade U.S. taxes. To achieve this, it mandates that FFIs identify and report information about financial accounts held by U.S. persons or by foreign entities with substantial U.S. ownership.
Key Entities Involved in FATCA Reporting:
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Foreign Financial Institutions (FFIs): These are the main reporting entities. An FFI is any non-U.S. entity that:
- Accepts deposits in the ordinary course of a banking or similar business.
- As a substantial portion of its business, holds financial assets for the account of others.
- Is engaged primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities.
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U.S. Payors: These include U.S. financial institutions and other entities that make payments to FFIs. They are responsible for withholding taxes on certain payments to FFIs that do not comply with FATCA.
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U.S. Taxpayers: While not directly reporting under FATCA in most cases, U.S. taxpayers with foreign financial accounts must report these accounts to the IRS through Form 8938, Statement of Specified Foreign Financial Assets, if the aggregate value of those assets exceeds certain thresholds. This complements the reporting done by FFIs.
What FFIs Must Report:
FFIs must report the following information to the IRS regarding accounts held by U.S. persons:
- Account holder's name, address, and U.S. Taxpayer Identification Number (TIN).
- Account number.
- Account balance or value.
- Gross receipts and gross withdrawals or payments.
Consequences of Non-Compliance:
FFIs that do not comply with FATCA face significant penalties, including:
- Withholding Tax: A 30% withholding tax on certain U.S. source payments made to the non-compliant FFI.
- Reputational Damage: Loss of access to U.S. markets and financial institutions.
In summary, FATCA reporting primarily falls on Foreign Financial Institutions, compelling them to disclose information about U.S. account holders to the IRS, to prevent tax evasion.
