Foreign Account Tax Compliance Act: Overview, definition, and example
What is Foreign Account Tax Compliance Act?
The Foreign Account Tax Compliance Act (FATCA) is a U.S. law that requires foreign financial institutions and certain non-U.S. entities to report information about accounts held by U.S. taxpayers to the Internal Revenue Service (IRS). FATCA was enacted in 2010 to combat offshore tax evasion by increasing transparency around foreign-held assets.
Why is Foreign Account Tax Compliance Act important?
FATCA is important because it extends the reach of U.S. tax enforcement beyond U.S. borders. Foreign banks, investment funds, and insurance companies that fail to comply may face a 30% withholding tax on certain U.S.-sourced payments. For businesses and investors, FATCA introduces significant reporting obligations and may impact banking relationships and transaction structures.
Understanding Foreign Account Tax Compliance Act through an example
If a U.S. citizen opens an investment account in Switzerland and earns dividends from U.S. stocks, the Swiss bank is required under FATCA to identify the account holder as a U.S. person and report account details to the IRS. If the bank does not comply, any U.S.-source payments it receives (e.g., from its own investments) may be subject to the 30% withholding tax.
Example of a Foreign Account Tax Compliance Act clause
Here’s how a Foreign Account Tax Compliance Act clause may appear in a contract:
"Each party shall comply with all applicable provisions of the Foreign Account Tax Compliance Act (“FATCA”), including any required documentation, reporting, or withholding obligations, and shall cooperate in good faith to provide information or certifications reasonably requested to ensure compliance."
Conclusion
The Foreign Account Tax Compliance Act affects a wide range of international financial relationships. For businesses and financial institutions that deal with U.S. persons or U.S.-source payments, FATCA compliance is not optional. Understanding these requirements is key to avoiding penalties and maintaining access to global financial markets.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.