Depending on which of the 22 different descriptions that they correspond to in part 1, which deals with the identification of the beneficial owner, entities are directed to different sections of the 25-part document.
Categories include foreign financial institution (FFI), non-financial foreign entity (NFFE) or variations of either, exempt retirement fund, certified deemed-compliant nonregistering local bank and excepted nonfinancial holding company.
Part II of the form allows entities to claim the benefits of the tax treaty between the US and their home jurisdiction. Part III refers to notional principal contracts “from which the income is not effectively connected with the conduct of a trade or business in the United States”.
FATCA, which was passed in 2010 as part of the HIRE (Hiring Incentives to Restore Employment) Act, will require foreign financial institutions (FFIs) to report to the IRS about their US taxpayer-held accounts. Otherwise, the institutions and accountholders deemed non-compliant face a 30% withholding tax on certain payments such as US source interest and dividends. Proposed regulations came out in February. The Treasury’s timetable calls for final regulations to be released before the end of the summer.
Affected financial institutions called on the US government to postpone the introduction of the legislation to give them time to put the processes in place to enable to identify their US accountholders and comply with the law. Some service providers believe the institutions could end up spending hundreds of millions of dollars.
The law was originally due to come into force in full on January 1 next year, but that will now be the start of a phased introduction of the rules.
The withholding tax of 30% will be imposed beginning January 1 2014 on US-source dividends and interest paid to non-participating foreign banks and financial institutions. Withholding on all applicable payments, including US-source gross proceeds of sale and pass-thru payments, will be applied from January 1 2015.