 
November 2011
The FATCA FiveAlongside our webinar series, we deconstruct the Foreign Account Tax Compliance Act one word at a time  (6 votes, average: 4.33 out of 5) Loading ...RBC Dexia has convened a webinar on the Foreign Account Tax Compliance Act (FATCA) to discuss how this far-reaching legislation will impact financial institutions worldwide. For your convenience, you can access the recorded webinar here as well as the presentation from KPMG. And for more insights, we explain below some of the key requirements of FATCA by deconstructing its key components – one word at a time.
1. Foreign FATCA requires Foreign Financial Institutions (FFIs) to identify and report accounts for US clients that hold financial assets outside the US of more than USD 50,000 (€36,500). An FFI is a non-US financial institution that:
But there are exemptions. ‘Deemed Compliant’ accounts are those that the US Internal Revenue Service (IRS) views to be exempt from some of the FATCA rules. However, the current criteria the IRS provides is very restrictive. The IRS is continuing to refine this definition in light of industry comments. Pensions are a key area under review. Additionally, the IRS expressed its intention to exclude the following types of entities from the definition of FFI:
2. Account FFIs are expected to enter into a disclosure compliance agreement with the IRS to attain Participating FFI (PFFI) status. PFFI’s are obligated to review pre-existing accounts to search for US indicia. PFFI’s are also required to apply increased scrutiny for certain types of accounts, including those for other FFIs, Non-Financial Foreign Entities (NFFEs) or Private Banking relationships. In addition, they must also implement enhanced account opening procedures to incorporate the new FATCA requirements to any new accounts opened after attaining PFFI status. FATCA requires punitive withholding tax on payments made to account holders that do not comply with the new rules, including accounts of Recalcitrant account holders, and Non-participating Foreign Financial Institutions (NPFFI’s). Recalcitrant account holders are those accounts with US indicia that fail to comply with reasonable requests for information by a PFFI. In general, an NPFFI is an FFI that does not enter into a PFFI agreement with the IRS. It is worth noting that certain Investment vehicles may deem it necessary to become a PFFI even if it does not hold any US assets directly or have any US investors in its registers. 3. Tax In general, PFFIs will be required to withhold 30% tax on a portion (ranging from 0% to 100%) of any “Passthru Payments” to recalcitrant account holders or NPFFIs. Passthru Payments are defined to include both Withholdable Payments (US-sourced interest, dividends and gross proceeds on disposition of assets) as well as amounts attributable to Withhdable Payments (non US-sourced interest, dividends and gross proceeds on disposition of assets multiplied by the pro-rata ratio of US to non-US assets). Under the design of FATCA rules, FFI’s cannot avoid these rules simply by disposing of their US assets. 4. Compliance Implementation was initially scheduled to start January 1, 2013. However, following extensive lobby efforts, the timeline was extended to allow FFIs adequate time to adapt their operations. Many of the requirements will now be phased in during the course of 2013-2015. Because IT systems enhancements are widely viewed to require up to 24 months to implement, financial institutions now need to conduct business impact assessments and begin to develop FATCA compliance programs.
5. Act The Act, which was passed in March 2010, requires financial institutions and asset managers to take action. The obligations are significant—requiring assessments and decisions about whether to accept the additional burdens and costs associated with FATCA compliance, or adapt their strategies to reduce their exposure to FATCA. There are other areas that asset managers should take into account. The information required to comply with FATCA in the investment funds industry is almost never possessed entirely by one party, so a coordinated effort will be required. According to a report by KPMG, FATCA and the Funds Industry: Defining the Path:
Many, however, are still unaware about how FATCA may affect them. RBC Dexia’s FATCA Quick Poll published in October found that 26% of respondents have little or no awareness or perception of the impact of the legislation on their operation. More troubling is that 66% of respondents had not yet introduced a program to deal with FATCA. RBC Dexia will continue to track FATCA readiness globally and assess the guidelines as they are published by the IRS and the US Treasury to help you manage the impact of FATCA. Raymond Li
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