FATCA—Delayed But Still Coming.
What Do EMDs need to know?
FATCA legislation will become effective soon and Exempt
Market Dealers (EMDs) need to know how to comply and what is
at stake if they do not.
What is FATCA?
The Foreign Account Tax Compliance Act or FATCA,
added provisions to the United States Internal Revenue
Code that essentially require foreign (i.e., non-US) financial
institutions (FFIs) to:
1. Register with the US Internal Revenue Service (IRS).
2. Identify their customers who are Americans.
3. Report these American customers to the IRS.
If an FFI does not comply with FATCA (called a
non-participating FFI), it would be subject to US withholding tax
on its and its customers US source income, including interest
and dividends, and proceeds from the disposition of property
that can produce US source interest and dividends. Thus, every
FFI will need to understand how FATCA would apply to its facts
and circumstances as its application and reach extend broadly
outside the United States.
Why did the US Congress pass FATCA?
The US Congress passed FATCA in 2010 to combat offshore
tax evasion by US persons. In the late 2000s, the IRS discovered
that there were thousands of US persons citizens who were
holding billions of dollars in secret bank accounts in Switzerland,
utilizing Swiss bank secrecy laws to evade US taxation. The
United States is very unique in that it requires its citizens (and
certain non-citizens) to report their worldwide income to the IRS
and pay US tax, regardless of whether its citizens are resident
in the United States. By contrast, Canada only subjects those
individuals who are resident in Canada to Canadian income tax.
The IRS focused its attentions on US persons who have not
filed US tax returns and paid US income tax. The IRS enacted
several formal Offshore Voluntary Disclosure Programs that gave
non-filers a process to follow to get up-to-date with their US tax
obligations. More recently in June 26, 2012, the IRS announced a
more streamlined process for low compliance risk non-filers (i.e.,
those that file simple US tax returns and owe less than $1,500 of
tax for each year). There are many Canadian residents who are
dual citizens with the US by reason of a US parent or a US birth
that have recently come to understand the US tax obligations and
liabilities that result from US citizenship.
Why do EMDs have FATCA obligations?
The definition of an FFI is very broad. It includes any non-US
entity that: accepts deposits in the ordinary course of a banking or
similar business, holds financial assets for the account of others
as a substantial portion of its business, or is engaged (or holds
itself out as being engaged) in the business of holding, investing
By Dan Lundenberg, Partner, US Tax Services, Grant Thornton Consulting