FATCA - Compliance costs and risks 

November 1: The Foreign Account Tax Compliance Act (FATCA) is legislation that was enacted in 2010 to prevent offshore tax abuses by U.S. persons. The goal of FATCA is to make certain that U.S. investors with financial accounts or other investments outside the United States pay tax on income from these accounts or investments. 

To achieve this, FATCA requires all global financial institutions—not only banks—to report the names and account details of all their U.S. account holders and/or investors on an annual basis. On October 24, 2012, the IRS released new FATCA guidance, including FATCA-related timelines.

Overview of FATCA

FATCA arrives at a time when financial institutions already face a range of significant economic and regulatory challenges, testing their capability and capacity to deal effectively with the new global environment. The FATCA requirements introduce a series of business and system requirements that are simple in concept, but difficult and costly to implement. And the price of noncompliance with the new rules is high.


The aim for financial institutions will be to meet the new global compliance burden at a cost that is proportionate to the compliance risk faced.


The FATCA rules contain two strong incentives to encourage compliance by attaching a high cost to noncompliance:


  • Individual account compliance: Foreign financial institutions may be required to withhold and remit to the IRS 30% of any withholdable payment (U.S. source “fixed, determinable, annual, periodical” income as well as the gross proceeds from the sale or other disposition of a U.S. equity or debt obligation issued by a U.S. person) paid to an account holder or investor that is not adequately documented.
  • Financial institution compliance: When a withholding agent—including a foreign financial institution—makes a withholdable payment to a foreign financial institution that has not yet entered into a required agreement with the IRS, the withholding agent will be required to withhold and remit to the IRS 30% of the payment.

FATCA challenge

FATCA is a unique challenge for financial intermediaries worldwide— its scope is broad and its requirements can be difficult to meet with the processes and systems currently in place.


  • FATCA is not just a tax issue: FATCA will affect financial institutions along several points in their client value chain. They will need additional client data, new reporting mechanisms, and systems to deliver them. Implementing the necessary changes will be difficult to achieve by the effective date as the changes affect and concern many different internal groups and require different technical expertise.
  • FATCA requires global coordination: To prepare for FATCA, financial institutions will need to coordinate FATCA implementation across different jurisdictions, reconciling several national legal frameworks.

Effective dates

FATCA is generally effective January 1, 2013, with the effective date of certain provisions phased in after that date.


To avoid the punitive withholding provisions, all foreign financial institutions must enter into an agreement with the IRS by December 31, 2013, committing them to meet a series of reporting and withholding obligations.

IRS guidance

Since FATCA was enacted in 2010, the IRS has issued preliminary guidance, including notices and proposed regulations.


In the most recent guidance, the IRS released an October 24 announcement concerning:


  • Timelines for withholding agents and foreign financial institutions to complete due diligence and other requirements
  • Additional guidance concerning gross proceeds withholding and the status of certain grandfathered obligations

Announcement 2012-42 [PDF 42 KB] states that the IRS and Treasury Department intend to incorporate these rules in final regulations.

Timelines

To see FATCA-related timelines (prepared by KPMG):



For further details concerning Announcement 2012-42, see TaxNewsFlash – United States - FATCA due diligence guidance, timelines


For more information, contact a tax professional in KPMG’s Washington National Tax practice:


Laurie Hatten-Boyd

+1 (206) 913 4489




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