Fatca requires proper due diligence of all financial accounts

The US is the sole major nation that imposes a tax on the income earned worldwide by its citizens and tax residents. The Philippines, North Korea, and Eritrea are the only other countries that tax the global earnings of their citizens and residents.

When residing overseas and generating income, US citizens are required to file an annual tax return with the Internal Revenue Service (IRS). Furthermore, US taxpayers with foreign accounts must disclose these accounts to the US Treasury Department.

To prevent tax evasion, the US government implemented the Foreign Account Tax Compliance Act (Fatca) in 2010. This legislation mandates that foreign financial institutions (FFIs) disclose details about financial accounts held by US taxpayers or by foreign entities in which US taxpayers have a significant ownership stake to avoid 30 per cent withholding tax on US source payments made to them.

Under the Fatca, a reportable person encompasses various categories, including US citizens or residents. Additionally, US entities that are deemed US taxpayers are also considered reportable persons under Fatca. Moreover, non-US entities that are substantially owned by US taxpayers fall within the scope of reportable persons, necessitating the disclosure of their financial accounts and assets to the IRS.

Fatca applies to a range of FFIs, including depository institutions such as banks, custodial institutions like mutual funds, investment entities like hedge funds or private equity funds, and specific types of insurance companies. These institutions are required to report information about financial accounts held by US taxpayers or by foreign entities in which US taxpayers possess a substantial ownership interest.

In general, the following categories of entities are exempt from Fatca requirements: most governmental entities, most non-profit organisations, certain small, local financial institutions, and specific retirement entities.

FFIs have the option to transmit this information either directly to the IRS by accessing their portal or through the competent authority of the relevant country where intergovernmental agreements (IGA) are established. A total of 113 jurisdictions, including China, have signed the IGA to adhere to Fatca, and the UAE is among those that have done so.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official of Khaleej Times but an opinion of the writer. For any queries/clarifications, please feel free to contact him at mahar@kresscooper.com.