FATCA and the structure of U.S. reporting rules

FATCA has its own terms, institutional reporting, withholding rules and connections to U.S. tax forms.

What FATCA means

FATCA is short for the Foreign Account Tax Compliance Act. The IRS describes reporting requirements for certain U.S. taxpayers with financial assets outside the United States and for foreign financial institutions holding specified accounts.^[1]

An FFI is a foreign financial institution, while an NFFE is a foreign entity that is not an FFI. These terms identify different categories of entities within the chapter 4 withholding rules.^[2]

A withholdable payment generally means U.S. source income that is fixed or determinable, annual or periodical. The IRS abbreviates that income category as FDAP and states that specific exceptions apply to the definition of a withholdable payment.^[2]

How the reporting responsibilities are divided

FATCA assigns reporting responsibilities both to certain U.S. taxpayers and to foreign financial institutions. Taxpayer reporting concerns foreign financial assets, while institutional reporting concerns financial accounts held by specified account holders.^[1]

Institutional reporting can cover accounts held by U.S. taxpayers and accounts held by foreign entities in which U.S. taxpayers have a substantial ownership interest.

Under its FFI agreement, a participating FFI has account holder identification and due diligence duties. Its reporting to the IRS is annual and covers account holders who are U.S. persons or foreign entities with substantial U.S. ownership.^[1]

How Form 8938 connects to an individual return

Form 8938 is the form certain U.S. taxpayers use to report foreign financial assets. Form 8938 reporting thresholds start at $50,000, with higher thresholds in some circumstances. When required, the form accompanies the taxpayer's annual income tax return.^[1]

Who acts as a withholding agent

A chapter 4 withholding agent can be a U.S. person or a foreign person with a specified role in a withholdable payment. The IRS definition covers control, receipt, custody, disposal, or payment of that payment, regardless of the capacity in which the person acts.^[2]

The definition also includes a participating FFI, including a reporting Model 2 FFI, and a registered deemed-compliant FFI to the extent the institution makes a withholdable payment.^[2]

How chapter 4 withholding is organized

Chapter 4 generally requires 30% withholding on a withholdable payment to an FFI unless the agent can treat the recipient as a participating FFI, a deemed-compliant FFI, or an exempt beneficial owner.^[2]

For a payment to an NFFE, the IRS describes 30% withholding where the entity fails to identify its substantial U.S. owners or certify that it has none. This requirement is subject to exceptions for payments under the regulations to section 1472.^[2]

An institution's category also determines which provisions govern its withholding duties. A participating FFI follows its FFI agreement, a reporting Model 1 FFI follows the applicable Intergovernmental Agreement, and other registered deemed-compliant FFIs follow the conditions attached to their status.^[2]

How other payment rules connect

Chapter 4 withholding takes priority when a payment is subject to both chapter 4 and chapter 3 withholding. To the extent an agent has withheld under chapter 4, the IRS says chapter 3 withholding is unnecessary on that payment.^[2]

Form 8966, called the FATCA Report, may be required for a withholdable payment to an entity treated by agreement as an owner-documented FFI or to a passive NFFE.

Questions and answers

Does FATCA involve reporting by individuals as well as institutions?

The IRS describes reporting by certain U.S. taxpayers holding foreign financial assets. It also describes foreign financial institutions reporting specified account information to the IRS.^[1]

Where does Form 8938 fit in my U.S. reporting?

Form 8938 is attached to the annual income tax return of a taxpayer subject to its reporting requirement. The form reports certain information about foreign financial assets with an aggregate value above the applicable threshold, which starts at $50,000.^[1]

Can an account held by a foreign entity enter institutional reporting?

Institutional reporting includes accounts held by foreign entities in which U.S. taxpayers hold a substantial ownership interest. Participating FFI annual reporting also covers foreign entity account holders with substantial U.S. ownership.^[1]

Is every payment a withholdable payment?

The IRS generally defines a withholdable payment by reference to U.S. source FDAP income. It also states that specific exceptions apply to withholdable payments.^[2]

Related glossary terms

Participating foreign financial institution: The IRS describes a participating foreign financial institution as an FFI that reports U.S. account holders who are specified U.S. persons under FATCA.
Specified individual: The Form 8938 instructions use specified individual for several categories of people. U.S. citizens and resident aliens count, as do some nonresident aliens.
Foreign grantor trust owner statement: The Instructions for Form 3520-A identify the Foreign Grantor Trust Owner Statement as pages 3 and 4 of the foreign trust's annual information return.