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FATCA’s July 2014 Compliance Deadline Approaching

on Friday, 2 May 2014 in Banking Update

In 2010, Congress passed the Hiring Incentives to Restore Employment Act, which included the Foreign Account Tax Compliance Act, otherwise known as “FATCA.” The implementation of FATCA was in response to perceived abuses by high net-worth American individuals and entities concealing assets in foreign accounts, and thus failing to pay all required federal taxes. FATCA responds to this problem by requiring both financial institutions and nonfinancial institutions involved in international payments of certain types of U.S. source income to participate in a complicated documentation, reporting, and possibly withholding regime. Although revenue production is not the goal of FACTA, the enforcement mechanism is a 30% tax on certain payments to noncompliant individuals and entities.

Entities classified as a Foreign Financial Institution (FFI) are the primary focus of FATCA compliance, which include non-U.S. banks, broker/dealers, insurance companies, hedge funds, securitization vehicles, and private equity funds. To comply with FATCA and avoid withholding on payments being received, FFIs must enter into FFI Agreements with the Treasury Department. These FFI Agreements require the FFI to determine if there are U.S. accounts, they must undertake verification and due diligence efforts, comply with annual reporting requirements, and withhold on payments to noncompliant FFIs or account holders. Alternatively, in countries that have entered into an Intergovernmental Agreement with the United States, FFIs will not need to enter into an FFI Agreement. However, those FFIs will instead have similar obligations to their local government, who in turn will report to the Treasury Department.

However, in addition to targeting FFIs, FATCA creates compliance requirements for U.S. entities, including non-financial entities, making certain types of international payments. A U.S. company making “withholdable payments” to international payees must comply with FATCA. Subject to certain exceptions, withholdable payments consist of “FDAP income” (standing for fixed or determinable annual or periodic income), which broadly includes all types of taxable income. However, nonfinancial payments are excluded from this definition, including payments for services, other forms of employee compensation, the use of property, office and equipment leases, software licenses, transportation, freight, gambling winnings, awards, prizes, scholarships, and interest on outstanding accounts payable arising from the acquisition of goods or services. If U.S. companies are making payments that would not fit within that exception, such companies will likely be required to obtain documentation from the payees and possibly withhold a percentage of the payments.

Although FATCA is primarily concerned with FFIs and accounts held in such institutions, this could create both immediate and long-term impacts on domestic banks. First, domestic banks will have FATCA compliance obligations if such banks are making withholdable payments to foreign payees. One example is if a domestic bank has any foreign owners, as payments of the bank’s profits internationally are withholdable payments. Second, domestic banks may want to advise customers planning to spend a substantial amount of time in other countries (such as students studying abroad or retirees) that opening bank accounts in foreign countries could be difficult, as foreign banks may try to avoid involvement with U.S. citizens. Third, in the long term, other countries may attempt to implement similar laws, resulting in domestic banks having to report foreign accounts and payments to other governments.


In the meantime, domestic banks should analyze their own businesses and payments being made internationally to determine whether they could be subject to compliance requirements. FATCA withholding for payments to noncompliant payees goes into effect on July 1, 2014, with reporting requirements coming due in 2015.


Daniel P. Fischer



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