In August, the U.S. Internal Revenue Service (IRS) announced the opening of its new online registration system for financial institutions that need to register with the IRS under the Foreign Account Tax Compliance Act (FATCA). Essentially, FATCA requires foreign financial institutions – including banks, investment funds, and insurance companies – to report any American offshore accounts valued in excess of $50,000.
The U.S. Treasury Department encourages financial institutions to begin to create an online account, familiarize themselves with the system, and begin submitting information. Starting in July 2014, financial institutions will be expected log into their accounts to finalize their information. That’s when the IRS will begin approving registrations.
How online FATCA works
The online FATCA system is a web-based application that provides 24-hour access, allowing financial institutions to register themselves and any branches they may have, electronically from anywhere in the world.
In a secure environment, users can now:
- Open online accounts
- Customize account management home pages
- Designate points of contact
- Oversee member and branch information
- Receive automatic notifications
FATCA’s impact on non-U.S. financial institutions
FATCA was enacted as an element of the Hiring Incentives to Restore Employment Act of 2010. The intent of FATCA is to prevent U.S. citizens from being able to hide income and assets overseas. An important part of FATCA is that it requires non-U.S. financial institutions to report to the IRS the holdings of U.S. citizens.
Non-U.S. financial institutions that do not comply with the reporting requirements face severe penalties. These penalties include a 30% withholding tax on income with a U.S. source. The IRS is scheduled to begin collecting data on the accounts of U.S. citizens from foreign financial institutions beginning in 2015.
The early launch of the system gives financial institutions subject to the law time to learn how to use the system and integrate it into their processes and technology. These financial institutions must begin to assess their current systems and operations to determine how much effort and investment is needed to comply. They must also develop action plans to implement any changes that are required.
There is also a significant legal component to compliance with FATCA. Non-U.S. financial institutions must make a determination whether they are covered by FATCA and thus required to comply with its reporting rules.
