For some within the industry, the mere mention of ‘FATCA’ is enough to spark compliance-nightmare flashbacks. Try to picture the halcyon days before that little five letter acronym entered our world. There was no CRS, no BEPS, no Section 871(m), no GDPR. It was, undoubtedly, a simpler time for those of us in the compliance world.

The ever unpopular FATCA regulations have now been with us for seven years. But, despite its relative longevity, there are a surprising number of misconceptions surrounding FATCA.

There’s No Such Thing…

For those of us outside the United States, the naming conventions of various legal frameworks can be a source of bewilderment and amusement (my personal favourite is the Robo Calls Off Phones “ROBOCOP” Act). So it is perhaps unsurprising that FATCA, or the Foreign Account Tax Compliance Act doesn’t actually exist. To be more precise, there isn’t an Act called FATCA. No. The regulations that we collectively refer to as FATCA form Title V of the Hiring Incentives to Restore Employment (HIRE) Act (2010). No, I don’t know how FATCA restores employment either.

Foreign Account TAX Compliance Act

FATCA’s existential crisis isn’t the only issue with the anti-tax evasion framework’s name. Counterintuitively, the FATCA regulations aren’t a tax system. The purpose of FATCA is to force non-US financial institutions (FIs) to find and report Americans to the IRS. However, the lines get blurry when FIs don’t play along. FATCA uses the withholding tax system to apply penalties to persons that are not disclosed to the US government. However, it is important to note that these are penalties, not taxes.

Overlap with NRA Withholding

We have found that many financial institutions treat FATCA and NRA withholding as two entirely separate frameworks. Often, the compliance functions for these two regulations are handled in isolation. However, there is considerable overlap between IRC Chapter 3 (the QI regulations) and IRC Chapter 4 (FATCA).

The first point of commonality is in the forms used. For both NRA and FATCA purposes, financial institutions solicit W8/W9 self-certification forms from their clients. These provide details of the account holder’s personal details, tax residency, and instructions for how the FI should treat the client for NRA withholding and FATCA. However, many FIs construct separate FATCA self-declaration forms, and collect these in addition to the W8/W9 form.

The other major point of commonality is that both regulations use the same system to withhold on payments. As such, both FATCA penalties and NRA tax withholding are processed using the same methodologies, reported on the same forms, and use the same oversight mechanism.

Despite the plentiful common ground between the Chapter 3 and Chapter 4 regulations, we have found that a many FIs treat the two in isolation. Clearly, this is not efficient. But, moreover, treating FATCA and NRA as entirely separate issues can introduce significant risk.

FATCA Means No Americans!

It’s fair to say that the industry reacted badly to FATCA. Non-US banks were quick to throw the baby out with the bathwater and almost overnight American persons living abroad were finding themselves without bank and investment accounts. This was, and still is, a complete overreaction. The burden of compliance imposed by FATCA is largely in the due diligence part of the framework – the actual act of reporting American clients to the IRS is relatively straightforward (by the IRS’ standards).

The FATCA Stick

FATCA’s big stick requires FIs to apply a 30% penalty to income paid to recalcitrant account holders and Non-Participating Foreign Financial Institutions (NP-FFIs). Many refer to this as a tax, however, as I mentioned earlier, FATCA withholding is a penalty, not a tax.

In addition to the confusion surrounding FATCA withholding categorisation, many seem to be befuddled by the application of FATCA penalties. The regulations demand a penalty for recalcitrant account holders. However, there is an Intergovernmental Agreement (IGA) clause that suspends this withholding for individuals and entities, as long as the account holder is included in the FIs FATCA report. So, in most cases, there is no penalty withholding.

FATCA is a complex regulatory framework and the five examples here barely scratch the surface. But, these small misconceptions about a regulatory instrument can have a big impact on an organisation.

For more information about FATCA and how it fits into the big picture, I highly recommend reading: GATCA – A Practical Guide To Global Anti Tax Evasion Frameworks. The book, written by myself, Chris Haye and Stuart Lipo, offers insight into the operational and compliance issues that are presented by FATCA, AEoI/CRS and BEPS. Not content with highlighting the problems with these frameworks, the book provides practical opinion on how institutions can implement effective and efficient controls processes.