Passed in 2010, the U.S. Foreign Account Tax Compliance Act (FATCA) is designed to detect offshore banking activities geared toward evading U.S. taxes. The law requires foreign financial institutions and other organizations that accept deposits to identify account holders who may be U.S. taxpayers, then pass on information about those individuals to the IRS so that agency can root out taxes owed. Transactions that involve an undocumented account holder and/or a noncompliant foreign financial institution will be subject to a 30 percent withholding tax.
T&R: For corporate finance departments, will this mean slower processes when working with banks?
EC: If a bank doesn’t use software to automate FATCA compliance—maybe they want to extend out the spend on updating all their systems—the time to on-board new clients is going to get extended. If you currently take 30 days to on-board a new client, including all your AML [anti-money laundering] checks and suitability checks, then adding FATCA checks could increase your on-boarding time to 60 days or 90 days. This could be frustrating for companies because they won’t be able to do business with a new financial institution until the on-boarding process is complete.
T&R: What happens if a company’s answers to the questions about U.S. indicia change over time?
EC: Financial institutions have to be notified of any change in circumstance so that they can determine whether they have a U.S. person within the schema and they can figure out whether that triggers an occurrence that is reportable to the tax authorities. For example, one of the questions FATCA asks is: Do you have a U.S. green card? Let’s say when a bank does the initial on-boarding of Company A, no one has a green card. But then a member of Family B goes to work in the U.S. and gets a green card. That person becomes a U.S. taxpayer at that point in time.