FATCA: Foreign Account Tax Compliance Act
This will require every Foreign Financial Institution (FFI) to enter into a voluntary agreement (or an Inter-Governmental Agreement) with the Internal Revenue Service (IRS) in the US, to examine every account for a US ownership connection (individual or corporate shareholder in excess of 10%), and to report on such account holders to the IRS annually. Failure to comply with these reporting requirements will result in a punitive withholding tax of 30% of the US$ transactions to the FFI.
FATCA will apply to payments made after 31 December 2012, and will be effective on 1 January 2014.
Every cross border US$ transactions clears through New York so many OTC derivatives will be captured for FATCA purposes.
9 June 2014: SA signed an Inter-Governmental Agreement with the IRS meaning SA FFIs will report their US connected accounts to SARS on an annual basis who in turn will report to the IRS.
A Foreign Financial Institution includes the following types of entities:
Any non-U.S. entity that:
Accepts deposits in the ordinary course of a banking or similar business
As a substantial portion of its business, holds financial assets for the account of others
Is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest in such securities, partnership interests, or commodities
Is a specified insurance company, or
Is a holding company or treasury center.
Any entity making or receiving a payment of U.S. source income should consider whether it is subject to FATCA. FATCA may apply to both financial and non-financial operating companies. Due to this breadth, FATCA impacts virtually all non-U.S. entities, directly or indirectly, receiving most types of U.S. source income, including gross proceeds from the sale or disposition of U.S. property which can produce interest or dividends.