In 2010, the Foreign Account Tax Compliance Act (FATCA) was signed into law, requiring both that United State citizens disclose their foreign accounts, and that those foreign financial institutions provide information regarding their U.S. clientele. In the past two years, more than two dozen foreign countries have entered into intergovernmental agreements with the United States to uphold this legislation.
With the growing number of countries worldwide voting to adhere to FATCA standards, financial institutions in the United States should take great care to comply with the regulations laid out. They, along with other types of local withholding agents, must retain 30 percent on certain payments made to locations outside the country, provided that they are not capable of providing relevant, FATCA-related data to the IRS.
In addition, these financial institutions have a requirement to disclose to the IRS data pertaining to particular non-financial overseas entities, provided that their proprietors are primarily from the United States.
When it comes to the strength with which these regulations are enforced on foreign banks, the IRS has revealed that it will not pursue entities as harshly if they make a "good faith" effort to comply with FACTA during a two-year "transitionary period," comprising 2014 and 2015. However, institutions that do not make such an effort can expect to receive no leniency from the IRS.
One example of a "good faith" effort is an alteration in how a particular institution handles new accounts.
"For example, the IRS will take into account whether a withholding agent has made reasonable efforts during the transition period to modify its account opening practices and procedures to document the chapter 4 status of payees," the agency said in an official bulletin on its website.
As such, the widespread adoption of FATCA adds additional value to enhanced due diligence. Background information on how a proposed foreign partner is handling this legislation may very well save a costly mistake.
