FATCA (FATCA)
FATCA, the US Foreign Account Tax Compliance Act, requires foreign financial institutions to identify accounts held by US taxpayers and report them to the IRS, directly or through their own government. Institutions that do not take part face 30 percent withholding on certain US-source payments.
Also called: Foreign Account Tax Compliance Act · FATCA reporting · FATCA withholding · Chapter 4 withholding
FATCA was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act and forms Chapter 4 of the Internal Revenue Code. Its target is tax evasion by US persons holding money through accounts abroad. A participating foreign financial institution must report accounts held by US taxpayers, and by foreign entities in which US taxpayers hold a substantial ownership interest. An institution that does not participate is subject to 30 percent withholding on certain US-source payments made to it, which makes opting out expensive for any bank that holds US securities or deals in dollars.
Most countries implement FATCA through an intergovernmental agreement with the US Treasury. Under a Model 1 agreement, institutions report to their own tax authority, which passes the information to the IRS. Under a Model 2 agreement, the government directs its institutions to report directly to the IRS under an agreement with it. FATCA became the template for the multilateral Common Reporting Standard, which the United States itself has not adopted.
FATCA also has an individual side: US taxpayers whose specified foreign financial assets exceed reporting thresholds, starting at US$50,000, must attach Form 8938 to their tax return. For a bank or fintech onboarding customers outside the United States, FATCA is why account opening asks whether the customer is a US person and collects an IRS Form W-9 or W-8, and why entity customers are asked about their beneficial owners. It is a core part of the reporting that changed offshore banking.
In practice
FATCA is a US regime with its own definitions, forms and registration. A firm compliant with CRS is not automatically compliant with FATCA, and the reverse.
Example
A bank in a Model 1 jurisdiction opens an account for a local company 40 percent owned by a US citizen. The bank records the owner's US taxpayer number, reports the account balance each year to its own tax authority, and that authority forwards the data to the IRS.
Learn more on Money Wiki
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Commonly confused with
| Term | How it differs |
|---|---|
| Common Reporting Standard | CRS is a multilateral exchange based on tax residence, run by the participating jurisdictions. FATCA is a US law based mainly on US citizenship and tax status, enforced by withholding. |
See also
- Common Reporting StandardThe Common Reporting Standard is the OECD's global standard for the automatic exchange of financial account information between tax authorities. Financial institutions identify accounts held by non-residents and report them each year, and the data is sent to the holder's country of residence.
- Offshore BankingOffshore banking is the provision of banking services, such as deposits, loans and payments, to customers who are not resident in the country where the bank and the account are located. It describes a relationship between bank and customer, not a particular place.
- Ultimate Beneficial OwnerThe ultimate beneficial owner is the natural person who ultimately owns or controls a customer, identified by tracing ownership up through holding companies, trusts and nominees. Twenty-five percent is the common anchor in the United States, the United Kingdom and the European Union, but each states it differently and control is tested alongside it.
- Know Your CustomerKnow Your Customer, or KYC, is the process of identifying and verifying a customer before a business relationship starts and keeping that understanding current while it lasts, so a firm knows who it is actually dealing with. Identity verification is the first step of KYC, not the whole of it.
- Customer Due DiligenceCustomer due diligence, or CDD, is the baseline set of checks a regulated firm performs on a customer: who they are, who owns and controls them, and what activity to expect. It is done at onboarding and then kept current for as long as the relationship lasts, with risk rather than a fixed calendar setting when it is revisited.