by Michael Treacy
The Foreign Account Tax Compliance Act (FATCA) forms part of the U.S. Hiring Incentives to Restore Employment Act of 2010. The overall aim of this legislation is to combat tax evasion by improving exchange of information between tax authorities in relation to U.S. citizens and residents who hold assets off-shore. FATCA obliges all U.S. paying agents to withhold tax of 30% from payments of U.S. source income that are made to any non-U.S. Financial Institutions unless that institution has entered into an agreement with the U.S. Internal Revenue Service (‘IRS’) to directly report certain information on Account Holders who are U.S. persons.
On 21 December 2012, the Minister for Finance, on behalf of the Government, signed an agreement with the U.S. in relation to the implementation of FATCA in Ireland (the Agreement). The Statutory Instrument implementing the Agreement (S.I. No 33 of 2013) is included in Part 3 of Schedule 24 to the Taxes Consolidation Act 1997. This Statutory Instrument together with the Financial Account Reporting Regulations 2014 (the Regulations) and section 891E of the Taxes Consolidation Act give legislative effect to the Agreement.
The Agreement provides for the automatic reporting and exchange of information on an annual basis in relation to accounts held in Irish Financial Institutions by U.S. persons, and the reciprocal exchange of information regarding U.S. Financial Accounts held by Irish residents. The effect of the Agreement is to give Irish laws and regulations precedence in governing FATCA compliance for Irish entities and it provides that reporting will be carried out to the Irish Revenue Commissioners, rather than to the IRS.
As a result of the Agreement, Irish Financial Institutions should not be subject to the 30% withholding tax on U.S. source income provided they comply with the requirements of the implementing Irish legislation.
SCOPE OF FATCA
The implementing legislation applies to all Irish Financial Institutions that maintain Financial Accounts where the Account Holder is:
a) a Specified U.S. Person or
b) a passive entity with controlling persons that are Specified U.S. Persons.
Such accounts are regarded as Reportable Accounts and a Reporting Financial Institution must identify all such accounts using the due diligence procedures set out in the Agreement and then submit a return containing details of these accounts to Revenue on or before 30 June each year.
Reporting Financial Institutions with no Reportable Accounts will be required to submit a nil return to Revenue.
In addition and for the tax years 2015 and 2016 only, a Reporting Financial Institution must submit details of payments made by it to Non-Participating Financial Institutions.
A Non-Participating Financial Institution (NPFI) is a Financial Institution that is not FATCA compliant. This situation will arise where: -
the Financial Institution is located in a jurisdiction that does not have an Intergovernmental Agreement with the U.S. and the Financial Institution has not itself entered into a FATCA agreement with the IRS,
or the Financial Institution is classified as being a NPFI due to significant non-compliance with its obligations.
An Irish Financial Institution will only be classed as an NPFI where there is significant non-compliance with the legislation and, following a period of enquiry, the institution has not rectified that non-compliance. Where a Financial Institution becomes a NPFI, details may be published by the IRS.
A Financial Institution is defined as an institution that:
a) accepts deposits in the ordinary course of business or similar business; or
b) holds financial assets for the account of others as a substantial portion of its business; or
c) is engaged in the business of investing, re-investing or trading in securities, partnership interests, commodities or any interest in such securities, partnership interest or commodities.
Examples of Financial Institutions would be:
b) building societies
d) asset managers
e) insurance companies
g) clearing houses
h) withholding agents; and
i) funds including hedge funds, funds of funds, private equity funds and ETFs.
There is also a de-minimis exemption where U.S. persons who maintain no more than US$50,000 in accounts with the same institution will not be affected by the new disclosure requirements.
Although primarily drafted with financial institutions in mind, it is important to understand that FATCA may also capture non-financial trading entities. If an entity does not fall into the definition of Financial Institution above but holds U.S. assets or has U.S. investors it will be treated as a non-financial foreign entity (‘NFFE’).
What is an NFFE? How does FATCA apply to NFFEs?
An NFFE is any non US entity that does not meet the definition of a Financial Institution. Certain NFFEs are excepted from FATCA and thus are “excepted NFFEs.” In general, those which are not excepted are subject to the FATCA withholding tax on any withholdable payment made to the NFFE unless the entity certifies that it does not have any substantial U.S. owners or provides the withholding agent the name, address, and T.I.N. of each of the beneficial owner’s substantial U.S. owners and the information is reported to the Irish Revenue.
What are passive NFFEs? What are active NFFEs?
As noted above, certain NFFEs are “excepted NFFEs” not subject to FATCA. The regulations do exempt most “active NFFEs” but each should be looked at on a case by case basis to confirm that the entity is exempt. For these purposes, an active NFFE is any NFFE, if less than 50 per cent of its gross income for the calendar year is passive income and less than 50 per cent of its assets are passive assets. If a NFFE is not active then it is considered to be a passive NFFE.
What should Irish entities do now?
a) Determine if the entity is an Financial Institution under Ireland’s Inter-Governmental Agreement (“IGA”)
b) Determine if the entity qualifies for any Exemptions
c) Undertake the necessary due diligence procedures to identify US Reportable Account
d) Prepare applicable information to report to the Irish Revenue Commissioners
e) Register for a Global Intermediary Identification Number (“GIIN”) via the IRS portal, if applicable
f) Consider applicability of other country’s IGAs or US FATCA Regulations to subsidiaries or branches of the entity that are located outside of Ireland
g) Consider the organisational impact on the entity’s business as a whole, including its interactions with other service providers affected by FATCA
2 June 2014 – IRS posted the first list of Financial Institutions which will be updated monthly
1 July 2014
New account on-boarding procedures must be in place
30% FATCA withholding tax commences for non-compliant entities. Reporting Irish financial institutions should not suffer withholding tax on payments received from the US.
30 June 2015 – Reporting Irish Financial Institutions to report details relating to calendar year 2014 to Irish Revenue
For further information please contact Michael Treacy of City Trust at firstname.lastname@example.org
Micahel Treacy is a City Trust board member and Head of Client Services
This document has been prepared as a general guide and it is based on information available as at July 2014. Whilst every care has been taken in its preparation, City Trust cannot accept any responsibility for any person relying on this publication.
Professional advice should be obtained before undertaking transactions and City Trust will be pleased to provide such advice where appropriate