The US Foreign Account Tax Compliance Act (FATCA) has been in effect since 1 July 2014. The law is part of the war on tax fraud and is aimed at tackling international tax avoidance by American citizens through a new system of global automatic data exchange.
What obligations have been introduced under FATCA?
Under FATCA certain identification, reporting and/or content obligations are imposed for parties based both in the US and abroad. In this way, the US Internal Revenue Service (IRS) hopes to eliminate those structures where American citizens seek refuge in foreign financial accounts where they can conceal income from the IRS. The act has a very wide scope and concerns both financial and non-financial entities/persons. Moreover, the fact that a country has signed a double taxation agreement with the US does not release the residents of that country from their obligations under FATCA. These obligations are not only due to the applicable FATCA legislation, but also to the domestic regulations specifically drawn up for each country. Belgium, for example, signed an intergovernmental agreement with the US on 23 April 2014 that means the FPS Finance undertakes to provide all information targeted by FATCA to the IRS.
How can this impact Belgian residents?
In practice it means that Belgian residents – whether private persons or legal entities – can be forced to deal with FATCA in a number of ways:
If the Belgian resident is a direct beneficiary of payments originating in the US:
In this case, a Belgian beneficiary of payments from the US shall have to identify themselves (mostly at the request of their customer/contracted party) to their American counterparty in order to avoid a 30% withholding tax upon payment of the sums concerned.
Because of the wide scope, almost all non-American persons or companies that receive some form of income from the US, whether directly or indirectly, are subject to the withholding of this source tax. The target income includes interest payments, dividends, rents, salaries, remunerations, premium, annuities, reimbursements, rewards, fees or any other fixed or determinable annual or periodic profits, revenue or income. Also targeted are the gross revenues from the sale of or any other transfer of all property that can result in dividends or interest. What this means is that the American debtor is required to withhold 30% tax at source, unless it is able to obtain the required documentation from the non-American beneficiary so that it can be ascertained in what manner this foreign beneficiary qualifies under FATCA.
By having an account with a non-American financial institution:
Here the targeted financial institutions (banks, insurance companies, collective investment bodies, etc) are required to impose upon their clients that have one of the ‘US indicia’ a series of obligations, including the obligation to identify themselves and the obligation to provide specific information concerning the financial accounts (which is a broader category than bank accounts alone) that these clients have with the institution.
‘US indicia’ include:
For natural persons:
- US citizenship or permanent US resident or a Green Card;
- US birthplace;
- At least one address in the US;
- A telephone number in the US;
- Instructions to pay amounts from a foreign financial account to a US account;
- A power of attorney for a financial account for a person with an address in the US.
For legal entities:
- If based or headquartered in the US;
- With an address in the US (place of business, postal address).
Foreign financial institutions that do not participate in FATCA or that do not properly comply with the FATCA obligations are subjected to ‘financial’ sanctions in the form of 30% withholding tax on the gross of those payments of American origin to the financial institutions in question (irrespective of whether these payments are on their own account or are received on account of their clients).
How can one avoid the withholding tax?
In order to comply with the FATCA obligations and thus avoid the 30% withholding tax, one must complete the various forms made available by the IRS for that purpose. If a Belgian beneficiary of US income or a client with a financial account with a non-American financial institution is concerned, then the W-9 (for US citizens), W-8BEN-E (for non-US entities) and W-8BEN (for non-US citizens) forms are the most common ones. For completing these forms, it can in some cases also be advisable to apply for a US tax number. When applying for such a tax number the foreign citizen or entity does not automatically become a taxpayer in the US – in fact, such a number could even be necessary in order to be able to claim certain exemptions under the double taxation agreement.
By completing these forms a person or entity qualifies under FATCA. Properly completing them, and hence the proper qualification of a foreign person or legal entity, is consequentially essential for avoiding the 30% withholding tax. In principle, the ‘payer’ of income or money of US origin or, where applicable, the non-American financial institution is responsible for the proper application of FATCA and the withholding.
That ‘payer’ or the non-American financial institution can thus also be held liable in the event of improper non-withholding. That means it cannot be ruled out that that party will, even for the smallest uncertainty or irregularity, err on the side of caution when it comes to the FATCA formalities and opt to deduct that withholding tax. If the withholding tax is deducted improperly one can, under certain circumstances, claim it back from the IRS. It must however be noted that such a procedure can take an extraordinarily long time as well as involving the necessary expenses, so we strongly recommend that the necessary FATCA formalities be completed in advance, thus avoiding a long and costly procedure at a later date in attempting to reclaim that 30% withholding tax.
In the global society of today, where financial transactions with American persons or entities can no longer be thought away, it is all the more important to prepare for the impact that FATCA can have in a financial sense, both for professional actors as well as ordinary individuals. As already stated, the scope of the act is extraordinarily wide, to the extent that sooner or later everybody could be affected by FATCA. Completing the forms properly and in good time is crucial when it comes to avoiding that – for safety’s sake but unjustly – 30% withholding tax is deducted.