FATCA self-certification could cause headaches for financial institutions

Sovos
August 25, 2015

The 2015 reporting deadline for the U.S. Foreign Account Tax Compliance Act is Sept. 30, and governments around the globe are doing what they can to gather information of U.S. citizens who have accounts in their financial institutions and report it back to the U.S. government.

FATCA, as it is commonly known, requires foreign financial institutions to report information about accounts held with them by U.S. citizens. It's an attempt to prevent U.S. citizens from offshoring assets to avoid paying taxes on them.

"Self-certification is when individuals declare they are citizens of the U.S. for tax purposes"

Self-certification and opening new accounts
If a U.S. resident opens a new account in another country, FATCA requires certain procedures to be followed. Nations, such as the British Virgin Islands, are developing what's called self-certification forms for U.S. residents to fill out when they open new accounts abroad, according to SKNVibes.com. Essentially, self-certification is when individuals declare they are citizens of the U.S. for tax purposes. For entities trying to open a new account abroad, they are required to self-certify if a significant portion of ownership is located in the U.S. The financial institution must then do its due diligence to further verify U.S. citizenship.

However, parts of FATCA aren't uniform in their application. The U.S. has developed different types of intergovernmental agreements to address issues of privacy raised by individual governments. Self-certification is a source of some ambiguity.

What happens when an individual or an entity tries to open a new account in a foreign financial institution and either doesn't provide self-certification, or it seems vague?

The intergovernmental agreements the U.S. has developed with the U.K. and Canada illustrate just such a lack of uniformity.

A matter of interpretation
Bloomberg BNA wrote that the guidance that U.K. officials have given to their financial institutions states that if the institution cannot obtain the self-certification at the time it is opened, the account should be treated as reportable. A reportable account means that the financial institution reports information on the account to the IRS, including name, address, Tax Identification Number and balance. The minimum balance for an individual's account to be reported to the IRS is $50,000.

"If the self-certification isn't provided, the IRS states that the account shouldn't be opened."

The guidance given by the Canadian government to its financial institutions is similar, Bloomberg BNA wrote. If self-certification is not complete or is completely absent, the account is treated as reportable. However, the Canadian guidance goes a step further and states that in no way should the institution refuse to open an account or deny service if the account holder doesn't provide the requisite self-certification.

Bloomberg BNA writes that if the self-certification isn't provided, the IRS states that the account shouldn't be opened, per the intergovernmental agreements.

"…if a Reporting Model 1 FFI [foreign financial institution] or a Reporting Model 2 FFI, in applying the due diligence procedures in Section III(B) of Annex 1 of the IGA, cannot obtain the self-certification upon the opening of new individual accounts, can the financial institution, nevertheless, open the account and treat it as a U.S. reportable account?" wrote Edward Tanenbaum for Bloomberg BNA. "The IRS responds 'no,' stating that, pursuant to Section III(B) of Annex 1 of the IGA, the financial institution must obtain the self-certification at account opening, failing which the financial institution cannot open the account."

Tanenbaum wrote that the intergovernmental agreements' annex pertaining to self-certification is ambiguous. According to Bloomberg BNA, the IRS's position is that it does not make sense to allow the account to be opened and have it reported on when it hasn't been verified that the account holder isn't a U.S. resident.

Financial institutions need clarity on the issue to prevent unnecessary reporting. And there are other issues regarding the interpretation of intergovernmental agreements. FATCA itself includes holding companies and treasury centers as examples of foreign financial institutions. However, agreements do not, reported Bloomberg BNA.

With the deadline for 2015 reporting fast approaching, governments and the U.S. Dept. of the Treasury may need to work to solve some of the discord. The guidance that governments give to their financial institutions for compliance with the U.S. law seems to differ, in certain situations, with what is in the intergovernmental agreements.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Sovos

Sovos is a leading global provider of software that safeguards businesses from the burden and risk of modern transactional taxes. As VAT and sales and use tax go digital, businesses face increased risks, costs and complexity. The Sovos Intelligent Compliance Cloud is the first complete solution for modern tax, giving businesses a global solution for tax determination, e-invoicing compliance and tax reporting. Sovos supports more than 7,000 customers, including half of the Fortune 500, and integrates with a wide variety of business applications. The company has offices throughout North America, Latin America and Europe. Sovos is owned by London-based Hg. For more information visit www.sovos.com and follow us on LinkedIn and Twitter.
Share This Post

LATAM VAT & Fiscal Reporting
May 20, 2020
Sovos Acquires Taxweb, Extends Tax Determination Capabilities in World’s Most Challenging Compliance Landscape

Earlier this month Sovos announced its second acquisition of 2020, completing our solution for Brazil with an unparalleled offering that solves tax compliance in the place where it is most challenging to do so.  Too many companies doing business in Brazil have been burdened by managing multiple point solutions for continuous transaction controls (CTCs), tax […]

ShipCompliant United States
December 3, 2020
Illinois’ New Economic Nexus Sales Tax Rules to Affect Direct Wine Shippers

Starting January 1, 2021, many direct-to-consumer (DtC) wine shippers will face an added sales tax burden on their shipments to Illinois. The Illinois Department of Revenue (DOR) published FY 2021-06, which explains the upcoming change. Under the recent “Leveling the Playing Field for Illinois Retail Act,” the state will require all remote sellers with economic […]

EMEA VAT & Fiscal Reporting
December 2, 2020
Brexit and Fiscal Representation

Recently, we outlined the need for speed in understanding fiscal representation obligations. As the UK looks set to become a third country from 1 January 2021, there will be many ramifications for businesses operating cross-border – among them the requirement to appoint a fiscal representative to register for VAT purposes. As outlined in our previous […]

E-Invoicing Compliance EMEA Italy VAT & Fiscal Reporting
December 2, 2020
Italian Tax Controls: Five Key Facts to Know Before the New Year

While Italy rolled out its continuous transaction controls (CTC) reform in 2019, 2020 has been a year of expansion. Italian authorities plan to leverage all potential benefits of the successful implementation of the country’s central e-invoicing platform. Many of the updates will either be launched or enforced in the upcoming year, or later in 2022. […]

Tax Compliance Tax Information Reporting United States
December 1, 2020
Unclaimed Property Dormancy Periods by State: What You Need to Know

Understanding unclaimed property dormancy periods by state and executing the appropriate decisions can make or break your company’s unclaimed property program. This is due primarily to the fact that each state has varying dormancy periods. To complicate matters even further, each state has specific dormancy periods for each corresponding property type. As a result, determining […]

Sales & Use Tax United States
December 1, 2020
How Was the Nevada Economic Nexus Law Modified?

When the Supreme Court ruled on South Dakota v. Wayfair, Inc., remote sellers and marketplace facilitators across the country had to make changes in how they collected and remitted sales tax. The Nevada economic nexus law is one example of a state modifying its requirements for both remote sellers and marketplace facilitators in relation to […]