FATCA Features

FATCA Features

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The Foreign Account Tax Compliance Act (FATCA) establishes certain limits and requirements that financial institutions and individuals must abide by. One of the key aspects of FATCA is the determination of the FATCA limit, which is the total value of an individual's foreign financial assets that triggers the reporting requirement. If the total value of their foreign financial assets exceeds the limit, they are required to report these assets to the Internal Revenue Service (IRS) using Form 8938.

Another important aspect of FATCA is the treatment of passive income. Passive income FATCA requires foreign financial institutions to identify and report certain types of passive income earned by their account holders who are U.S. taxpayers. Passive income includes dividends, interest, rents, royalties, and similar types of income derived from investments or assets. Under FATCA, foreign financial institutions are required to review their account holders' income to determine whether it falls under the category of passive income. If it does, the financial institutions must report this income to the IRS as part of their FATCA reporting obligations. This provision helps ensure that U.S. taxpayers' income from foreign investments is properly reported and taxed.

In order to comply with FATCA, foreign financial institutions must also complete FATCA GIIN registration. GIIN stands for Global Intermediary Identification Number and it is a unique identifier assigned by the IRS to foreign financial institutions that have registered under FATCA. The GIIN is used to identify and track financial institutions' compliance with FATCA requirements. It involves providing detailed information about the institution, its structure, ownership, and compliance procedures. Financial institutions that fail to register and obtain a GIIN may face significant penalties, including being subject to a 30% withholding tax on certain U.S.-sourced payments.

While highlighting FATCA, it is worthwhile to mention that there is a difference between Report of Foreign Bank and Financial Accounts (FBAR) and FATCA. While both aim to prevent tax evasion and promote transparency, they have different reporting requirements and apply to different entities. FBAR is a separate reporting requirement administered by the U.S. Financial Crimes Enforcement Network (FinCEN). It requires U.S. persons to report their financial interests in foreign financial accounts. FBAR focuses on reporting the existence of foreign accounts, while FATCA primarily focuses on the income generated from those accounts and requires reporting by both U.S. individuals and foreign financial institutions.