FATCA – Foreign Account Tax Compliance Act

The Foreign Account Tax Compliance Act (FATCA) is a US federal law enacted on March 18, 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. It requires foreign financial institutions (FFIs) worldwide to report information about accounts held by US persons to the Internal Revenue Service (IRS), or withhold a 30% tax on certain US-source payments.

FATCA's primary objective is to combat tax evasion by US taxpayers holding assets in foreign accounts. The law created a new global infrastructure for the automatic exchange of tax information and is widely regarded as one of the most far-reaching regulatory interventions in international finance in the 21st century.

To facilitate international implementation, the United States concluded bilateral Intergovernmental Agreements (IGAs) with numerous countries, embedding local reporting obligations in domestic law and mitigating diplomatic tensions arising from the extraterritorial reach of the statute.

FATCA's origins lie in growing Congressional concern over the use of offshore accounts for tax evasion. The immediate catalyst was the UBS scandal (2007–2009), in which the Swiss banking giant was accused of actively helping US clients evade taxes. In 2009, the US Department of Justice reached a settlement under which UBS paid USD 780 million and disclosed approximately 4,450 client records.

Against this backdrop, Congress enacted FATCA in March 2010. The final FATCA regulations were published by the IRS in January 2013. Withholding obligations on payments to non-compliant FFIs phased in gradually: from July 1, 2014 for US-source fixed, determinable, annual or periodical (FDAP) income, and from January 1, 2017 for gross proceeds from the sale of US securities.

Beginning in 2012, the United States negotiated IGAs with numerous countries, including Germany, Switzerland, Austria, and other major financial centers. By 2024, more than 110 jurisdictions had signed or were in advanced negotiations on an IGA. FATCA served as the blueprint for the OECD's subsequent Common Reporting Standard (CRS) for automatic exchange of financial account information.

FATCA covers two principal categories of obligated parties:

• Foreign Financial Institutions (FFIs): Banks, custodians, investment funds, insurance companies with savings elements, and other financial intermediaries outside the United States that must identify and report US accounts.
• Non-Financial Foreign Entities (NFFEs): Foreign non-financial entities receiving certain payments that may be required to disclose their substantial US owners.

Reportable accounts are those held by US persons, meaning US citizens (including those living abroad), US residents (Green Card holders and tax-resident aliens), certain US corporations, and trusts or estates with US nexus. Exempt entities include central banks, governmental institutions, certain pension funds, and qualifying collective investment vehicles (Deemed Compliant FFIs).

The core obligations under FATCA include:

• Registration: FFIs must register on the IRS FATCA Registration Portal and obtain a Global Intermediary Identification Number (GIIN).
• Due Diligence: Existing and new accounts must be screened for US indicia under prescribed procedures, including US place of birth, US address, US telephone number, or standing instructions to transfer funds to US accounts.
• Reporting: Annual reporting of account data (name, address, TIN, account balance, income, and gross proceeds) to the IRS – either directly (Model 2 / non-IGA FFIs) or via the domestic tax authority (Model 1 IGAs).
• Withholding: Withhold 30% on withholdable payments (US FDAP income and, from 2019, gross proceeds) made to non-compliant FFIs and recalcitrant account holders.
• W-8 Forms: Collect and maintain appropriate IRS forms (W-8BEN, W-8BEN-E, W-9) to document account status.

1 update:
- FATCA key_dates: Recent IRS developments (TIN Relief 2023-2027) missing