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What is FATCA?
FATCA was enacted as part of the Hiring Incentives to Restore Employment Act of 2010 and consists of five parts, with only the first being relevant to this interview. This section, Part I — Increased Disclosure of Beneficial Owners, is codified in sections 1471–1474 of the IRC. FATCA also encompasses the final and proposed U.S. Treasury regulations issued under the statute, additional IRS interpretive guidance such as FAQs, FATCA intergovernmental agreements between the United States and over 100 countries, and the local leg, regulations, and guidance adopted worldwide to implement FATCA.
How is FATCA Enforced?
Chapter 4, known as FATCA, imposes a 30% withholding tax on withholdable payments made to certain foreign financial institutions (FFIs) and nonfinancial foreign entities that fail to meet specific documentation requirements regarding foreign payees.
What is a Withholdable Payment Under FATCA?
Tax Withholding refers to the income tax that is withheld and paid to the government by the payer of the income, rather than by the recipient. In this process, the tax is deducted from the income owed to the recipient.
As for Chapter 4 requirements, you are considered a withholding agent if you are a U.S. or foreign person, acting in any capacity, who has control, receipt, custody, disposal, or payment of a withholdable payment. The rules for determining who qualifies as a withholding agent under Chapter 4 are similar to those outlined in Chapter 3’s withholding requirements.
For Chapter 4 purposes, a withholding agent includes a participating foreign financial institution (FFI) (such as a reporting Model 2 FFI) or a registered deemed-compliant FFI, to the extent that the FFI makes a withholdable payment.
FATCA: Forms and Withholding Requirements
Chapter 4 withholding commenced on July 1, 2014, for certain withholdable payments of FDAP income. It expanded on January 1, 2017, to include offshore payments of U.S.-source income, payments of certain gross proceeds from the sale or disposition of property capable of generating U.S.-source FDAP income, and foreign passthrough payments. For this purpose, FDAP income encompasses withholdable payments under Chapter 3 as outlined in Regs. Sec. 1.1441-2(b)(1) or Regs. Sec. 1.1441-2(c).
Can You Be An FI for CRS and CARF But Not An FFI For FATCA?
Yes. For example, if the U.S. does not implement CARF, crypto would not be considered a financial asset. A PMIE is subject to a test requiring at least 50% of its assets to be financial assets. Similarly, a Custodial Institution must meet the condition of holding financial assets. In such cases, the entity would not qualify as a CI or PMIE.
Handling FATCA Letters from Financial Institutions
A “FATCA letter” is a communication from your financial institution requesting clarification about your potential U.S. tax status. Typically, it asks you to complete either a W-9, W-8BEN, W-8BEN-E form, or the bank’s own questionnaire, which gathers essentially the same information. The letter often provides a brief and incomplete explanation of the U.S. Foreign Account Tax Compliance Act (FATCA), a law requiring banks to review their records for potential U.S. depositors and obtain information from individuals identified as potentially connected to the United States.
Understanding FATCA Forms 8938 and 8966
Use Form 8938 to report your specified foreign financial assets if the total value of all such assets in which you have an interest exceeds the applicable reporting threshold. File Form 8966 to report information regarding:
- Certain U.S. accounts,
- Substantial U.S. owners of passive non-financial foreign entities (NFFEs),
- Specified U.S. persons who own certain debt or equity interests in owner-documented foreign financial institutions (ODFFIs), and
- Other applicable accounts, depending on the filer’s Chapter 4 status.
FATCA and Assets Without Foreign Income
Merely holding foreign assets, whether financial or otherwise, may need to be reported, but it is typically not subject to withholding.
How do FATCA Form 8938 and FBAR differ?
The requirement to file Form 8938 does not replace or modify a taxpayer’s obligation to file FinCEN Form 114, also known as the Report of Foreign Bank and Financial Accounts (FBAR). Unlike Form 8938, the FBAR is not submitted to the IRS. Instead, it must be filed directly with the Financial Crimes Enforcement Network (FinCEN), a bureau within the Department of the Treasury, independent of the IRS.
Individuals and domestic entities must carefully review the filing requirements and applicable reporting thresholds for both forms to determine whether they are required to file Form 8938, FinCEN Form 114, or both.
Difference Between FATCA 8938 and Certain Other Forms (5471, 8621, 8865)
Tax information reporting has evolved into a highly complex task for institutions, businesses, and individuals alike. The burden has been particularly heavy on those required to report transnational transactions. Over time, a tangled web of disclosure and withholding requirements has developed, creating significant challenges. These rules impact both U.S. persons—defined under Sec. 7701(a)(30) to include domestic individuals, corporations, partnerships, estates, and trusts—and non-U.S. persons, which encompass any individuals or entities that do not qualify as U.S. persons. The implementation of the Foreign Account Tax Compliance Act (FATCA) several years ago only intensified the already substantial challenges faced by entities operating in the international space.
