New to FATCA? Here is What You Need to Know

December 18, 2015by Team IRIS CARBON0

The Foreign Account Tax Compliance Act (FATCA) is a US federal law enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act on March 18, 2010. It became effective on July 1, 2014, with a phased implementation timeline spread over 2.5 years. FATCA aims to prevent tax evasion by detecting foreign financial accounts of U.S. domestic taxpayers through participating Foreign Financial Institutions (FFI). For FFIs, non-compliance to FATCA could mean facing a 30% withholding tax on certain U.S.-source payments made to them.

Are you a Foreign Financial Institution?

Foreign Financial Institutions or FFI, are the intermediary institutions that US taxpayers approach for foreign investments. FATCA regulations include (but are not limited to) the following 4 entities* under FFIs:

1. Depository institutions such as banks

2. Custodial institutions like mutual funds

3. Investment entities like hedge funds or private equity funds

4. Certain types of insurance companies that have cash value products or annuities

*As specified by IRS on Information for Foreign Financial Institutions

Initially, the law was meant to form the basis of a relationship between the U.S. Department of Treasury and individual FFIs. However, FFIs were facing problems in integrating FATCA with their own countries’ laws (with respect to privacy, confidentiality, discrimination, etc.). Hence, the US Government started entering into InterGovernmental Agreements ( IGAs) with countries (called partner countries) to assist them in implementing FATCA in one or more local jurisdictions by helping to reduce compliance burdens and overcome legal barriers for the FFIs.

Intergovernmental Agreement (IGA): What & Why?

In an IGA signed with a partner country, the government confirms FATCA compliance of all of its financial institutions, whereas, without the IGA, individual FFIs can decide for themselves.

The IGA has been modeled in 2 ways – Model 1 where FFIs report information to the local jurisdiction which in turn reports it to the Internal Revenue Service (IRS) on an automated basis (the exchange can be reciprocal or non-reciprocal); and Model 2, where the FFIs directly report information to the IRS.

What FATCA Regime Do You Fall Under?

Every FFI needs to register on the “FATCA Registration Website”. Upon approval, the FFI receives a Global Intermediary Identification Number (GIIN) from the IRS, unless the FFI is treated as a Limited FFI. Then, depending on whether an IGA is signed or not and the model of IGA signed, there can be 3 regimes of FATCA reporting that each FFI can be subject to, based on its country’s participation.

1. Directly under FATCA Regulation

Those non-US entities that reside in a jurisdiction that has not signed an IGA. Termed Participating FFIs(PFFI), they directly enter into an agreement with the IRS. If the FFI remains non-compliant, it will be considered a non-participating FFI. PFFIs are required to:

• withhold 30% tax on US source payments made to non-compliant account holders,
• request the US account holders to waive privacy or secrecy rights,
• close the account if a waiver is not provided, and
• provide a certification of compliance by a responsible officer

2. FFIs under IGA

Those non-US entities that reside in a jurisdiction that has signed an IGA. You can know if your jurisdiction falls under the category by clicking here: IGA List of Participants. However, further implications can be different for different models:

1. FFIs located in an IGA Model 1 Jurisdiction ( Reporting FFI Model 1)

            a. ​Reciprocal Model 1A Agreement:

FFIs share information with local regulatory authorities who in turn share the required information with the                 IRS. In reciprocation, the IRS also shares information with partner countries to help them reduce their tax evasion.

India has entered into an IGA Model 1 Agreement with the IRS.

            b. Nonreciprocal Model 1B Agreement:

This differs in that information is only shared with the IRS and not the other way round.

2. FFIs located in an IGA Model 2 Jurisdiction ( Reporting FFI Model 2)

FFIs directly upload the FATCA reports in the mandated XML format onto the IRS portal without any intermediary.

3. Non-Financial Foreign Entities (NFFE)

The definitions of who is an FFI are complex. Hence, all those who are not FFI, are deemed to fall under this category. All NFFEs either need to report that they do not have any substantial U.S. owners or provide information with respect to their substantial U.S. owners. This can be done either directly to the IRS or via an FFI from which it holds an account and/or receives payments. Failure to comply may result in the FFI having to deduct and withhold a tax equal to 30 percent of payment due to the passive NFFE.

In summary, the compliance burden of FFIs is going to increase manifold in response to FATCA. Irrespective of the category an FFI falls into, non-compliance could result in withholding tax equal to 30 percent of a holdable payment due to the institution.

It’s Crunch-time now. Are you FATCA ready?

The first reporting under FATCA is due in 2015 for reportable US persons’ account balances. FFIs are required to submit balances and/or valuations of certain types of assets of U.S. domestic taxpayers maintaining accounts with them as of December 31, 2014. The information will include details of both the account owners and the submitting organization.

However, the process of submission, depending on the applicable regime, will vary by country and each taxing authority will specify the format in which it requires reports to be submitted. In many countries, this may be the IRS-issued XML schema while in others such as the UK and India, a slightly different local schema will need to be used.

This change in schema and process could pose challenges for large financial institutions that provide multiple services across several countries. Consequently, there is a need to adopt a one-stop solution that can provide reliable and efficient compliance reporting while also being flexible to local business demands.

The IRIS FATCA Reporting Application is a standalone desktop solution for all your FATCA reporting needs. In India, over 14 entities, including banks, insurance companies, and mutual funds have used the application to file their first-year FATCA reports to the local tax authority, the Central Board of Direct Taxation (CBDT). The application with its easy-to-use interface and built-in business validations, when combined with our expert assisted services can become the only solution you will ever need in order to comply with FATCA.

For more information on our solution, please contact us at

For a Free Demo of the IRIS CARBON® Solution.

Leave a Reply

Your email address will not be published. Required fields are marked *