The Foreign Account Tax Compliance Act (FATCA) was passed in 2010 by the United States government. FATCA’s main goal is to reduce evasion of tax obligations by US citizens who have accounts abroad as well as to generate increased tax revenue for the US. This requires Foreign Financial Institutions (FFIs) be responsible for collecting and reporting data they have not had to previously report. This is the beginning of reporting transparency that impacts the entire landscape of global reporting.
There are three different reporting regimes that govern how FFIs comply with FATCA, depending on the local jurisdiction IGA (Inter-Governmental Agreement), or lack thereof, in place with the United States:
- IGA Model 1: FFIs submit their data to their local HCTA (Host Country Tax Authority). The HCTA will then submit the information onto the IRS.
- IGA Model 2: FFIs submit data directly to the IRS.
- Non-IGA Jurisdictions: FFIs with a reporting obligation in a jurisdiction without an IGA will submit the data directly to the IRS.
Each participating financial institution is required to register for a Global Intermediary Identification Number (GIIN). The GIIN is used by an FI to identify itself to withholding agents and tax administrations for FATCA reporting.
Under FATCA, FFIs must report accounts of individuals that are US persons that exceed the minimum threshold balance of $50,000 and entity accounts with substantial US ownership that exceeds the minimum threshold of balance $250,000.
Additionally, FATCA includes a dramatic expansion of Non-Resident Alien (NRA) tax reporting and has resulted in IRS Forms 1042 and 1042-S being revamped.