FATCA (Foreign Account Tax Compliance Act)

The Foreign Account Tax Compliance Act (FATCA) is a United States law under which banks, funds and other financial institutions located abroad must search their books for accounts belonging to US taxpayers, or to foreign entities with substantial US owners, and pass details of those accounts to the Internal Revenue Service (IRS), whether by filing with the IRS themselves or by going through the tax authority of their home country. Institutions that do not participate face a 30 percent withholding tax on certain payments of US-source income.

FATCA was enacted in March 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. It was a response to evidence that US taxpayers were hiding income in undeclared offshore accounts, highlighted by the investigation of Swiss bank UBS in 2008 and 2009. It became the model for the global system of automatic exchange of financial account information.

FATCA operates on two levels. For individuals, it requires US taxpayers with specified foreign financial assets above certain thresholds to report them on Form 8938 with their tax return, in addition to the separate foreign bank account report (FBAR) required under the Bank Secrecy Act and filed with FinCEN.

For institutions, it imposes obligations on "foreign financial institutions" (FFIs), a broad category that includes banks, custodians, many investment entities and certain insurance companies. A participating FFI must:

• register with the IRS and obtain a Global Intermediary Identification Number (GIIN);
• apply due diligence procedures to identify US accounts, using indicia such as a US place of birth, US address or US telephone number, and collecting self-certifications such as Forms W-9 and W-8BEN;
• report each US account's holder, taxpayer identification number, balance and income annually;
• withhold 30 percent on certain payments to non-participating institutions and recalcitrant account holders where required.

Non-financial foreign entities must disclose their substantial US owners to the institutions that pay them, which links FATCA to beneficial ownership checks performed during know-your-customer onboarding.

Many countries' privacy and bank secrecy laws prevented their institutions from reporting directly to a foreign tax authority. The US Treasury therefore negotiated intergovernmental agreements (IGAs). Under a Model 1 IGA, institutions report to their own tax authority, which forwards the data to the IRS, in some cases reciprocally. Under a Model 2 IGA, institutions report directly to the IRS with their government's authorization. More than a hundred jurisdictions have signed IGAs, and local law in those countries implements the due diligence rules, so a bank in a Model 1 country is complying with its own domestic legislation.

The 30 percent withholding applies to "withholdable payments," principally US-source fixed or determinable annual or periodical income such as interest and dividends. Withholding on gross proceeds from the sale of US securities was part of the original design, but proposed regulations issued in 2018 removed it, and taxpayers may rely on that proposal. The threat of withholding, rather than its actual collection, is what drives compliance, because almost any institution with US investments or US-dollar business would be affected.

FATCA changed account opening worldwide. Banks, e-money institutions and investment platforms now ask every customer about US tax status, and many entities must be classified on onboarding forms. Some institutions responded by refusing to open accounts for US citizens living abroad, a form of de-risking that became a long-running grievance for that community and contributed to a rise in renunciations of US citizenship. Payments firms that only move money and do not maintain financial accounts are often outside FFI status, but those holding stored balances or investment products need careful analysis. FATCA classification is a tax question that sits apart from the payments-specific rules such firms may also face, such as registration under Canada's Retail Payment Activities Act or the strong customer authentication requirements that apply to payment providers in Europe and the UK.

FATCA inspired the OECD's Common Reporting Standard (CRS), approved in 2014, under which participating jurisdictions exchange account information with each other based on tax residency. The United States has not adopted the CRS, relying instead on FATCA, whose reciprocity under IGAs is more limited. This asymmetry has led critics to describe the United States as a potential tax haven for foreign investors, even though it pioneered the model.

FATCA has been criticized for its compliance cost relative to the tax it recovers, for its extraterritorial reach, and for the burdens it places on ordinary Americans abroad, who face reporting duties and difficulty obtaining local bank accounts. Supporters credit it with ending the era of routine bank secrecy for US taxpayers and with prompting global tax transparency. For the agency that administers it, see the Internal Revenue Service regulator profile.

• Internal Revenue Service