CFPB proposes new federal oversight
What is The Foreign Account Tax Compliance Act (FATCA)?
FATCA is a U.S. legislation intended to curb the use of offshore accounts and financial assets to evade U.S. taxes. The law mandates reporting obligations for U.S. nationals, FFIs, and non-financial foreign entities (NFFEs) to the US Department of the Treasury regarding foreign assets.
The Foreign Account Tax Compliance Act (FATCA) is a law that requires foreign financial institutions to report on the assets held by U.S. account holders. It was passed over a decade ago and recently experienced amendments offering temporary relief from some of the original requirements. Specifically, Notice 2023-11, issued by the Internal Revenue Service (IRS), offers temporary relief for Model 1 Intergovernmental Agreement (IGA) Foreign Financial Institutions (FFIs) [1] in reporting client [2] information to the IRS. This notice, issued on January 3, 2023, is yet another effort by the regulators to improve the data collection process and strengthen enforcement mechanisms. Model 1 foreign institutions should prepare to proactively ensure their reporting of client data is in alignment with the envisioned and evolving regulatory landscape.
Foreign Account Tax Compliance Act
FATCA, enacted in 2010 as part of the HIRE Act, represents a significant U.S. legislation intended to curb the use of offshore accounts and financial assets to evade U.S. taxes. The law mandates reporting obligations for U.S. nationals, FFIs, and non-financial foreign entities (NFFEs) to the US Department of the Treasury regarding foreign assets. FFIs who fail to comply with IRS regulations risk exclusion from the U.S. market and a substantial 30% tax penalty on withholdable payments.
FATCA introduced two IGA models: Model 1 and Model 2. Under Model 1 IGA, FFIs report account holder information to their country’s tax authority, which subsequently transfers the data to the IRS. In contrast, Model 2 IGAs empower FFIs to report directly to the IRS based on negotiated protocols with the FFI’s country of residence.
The U.S. has successfully negotiated over 100 IGAs with foreign jurisdictions, enabling an efficient exchange of specified information about U.S. accounts. Model 1 IGA countries include EU nations (excluding Austria), Australia, China, Saudi Arabia, the United Kingdom, and the UAE, while Model 2 countries comprise amongst others, Switzerland, Hong Kong, and Japan. Further information on Model 1 and Model 2 IGA’s can be found here.
According to the IGA terms, Model 1 FFIs are required to report the tax identification number (TIN) of their U.S. account holders to the IRS. The law was implemented progressively, with an initial three-year transition period from 2014 to 2016 that granted relief to promote voluntary compliance, exempting Model 1 FFIs from reporting U.S. TINs for preexisting accounts not already in their records. Additionally, this transition relief, extended in 2017, aimed to avoid the 30% withholding tax.
Despite the six years of relief, reports from Model 1 IGA jurisdictions continued to have missing U.S. TINs. This prompted the IRS to introduce No TIN Reason Codes, to effectively categorize and monitor specific scenarios when obtaining and reporting a U.S. TIN proved challenging
IRS Notice 2023-11
The compliance procedures outlined in Notice 2023-11 deem an FFI in an eligible Model 1 IGA jurisdiction as compliant, even if it does not report U.S. TINs for pre-existing accounts. To access this relief, reporting Model 1 FFIs must use the updated IRS-issued TIN Codes, providing insights into the reasons behind the absence of U.S. TINs. In addition, Notice 2023-11 reinforces compliance expectations, including:
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Obtaining and reporting the date of birth for each account lacking a TIN.
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Initiating annual TIN requests from account holders.
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Conducting electronic searches annually for any missing TINs in "searchable" data.
Model 1 FFIs are required to utilize the revised TIN codes when clarifying the inability to report a U.S. TIN for customer accounts during the reporting calendar years 2023 (to be submitted by 30 September 2024) and 2024 (to be submitted by 30 September 2025).
Additionally, to meet the obligation of obtaining missing TINs from each account holder, reporting Model 1 FFIs should employ a communication method deemed most effective in reaching the account holder. This communication must include either:
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The web address of the State Department’s Joint FATCA frequently asked questions (FAQs), or;
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A copy of the FAQs and, in conjunction, either (a) a copy of the relief procedures issued by the IRS for certain former citizens, or (b) the web address for such procedures.
FFIs must maintain records of the policies and procedures adopted for compliance with this requirement, along with documentation proving adherence to these policies and procedures. These records must be retained until the conclusion of the calendar year 2028.
The updated list of TIN codes has specific use cases, and each code can be applied to individual, entity and dormant accounts. Codes can be primarily used in scenarios where a US TIN is unavailable, and the FFI needs to verify or acquire client information to identify account holders or entities. Among these codes, namely 000222111, 444444444, and 666666666, are designated for pre-existing individual or entity accounts, necessitating the gathering and validation of additional information. Codes 333333333 and 555555555 are assigned to new accounts where existing client/entity information is unreliable and needs verification. Furthermore, code 777777777 is applicable for dormant accounts lacking an available TIN, while code 999999999 can be used in instances where a TIN code cannot be obtained for any account, and none of the other codes are relevant.
Updated List of TIN Codes and their Applicability
| TIN Code | Applicability |
|---|---|
| 222222222 | Pre-existing individual accounts with only U.S. indicia (e.g., U.S. place of birth) except when reported under code 000222111. This code takes precedence if other codes are applicable. |
| 000222111 | Pre-existing depository individual accounts with only U.S. indicia, specifically a U.S. place of birth. Additionally, FFI must ascertain that the account holder is a resident of the jurisdiction where the account is maintained for AML and tax purposes. |
| 333333333 | New individual accounts exhibiting U.S. indicia other than a U.S. place of birth. Used in cases, when the reliability of the self-certification may be compromised due to changes in the account's status or conditions. |
| 444444444 | Pre-existing individual or entity accounts with U.S. indicia other than a U.S. place of birth. Used in cases where there is a change in circumstances resulting in associated U.S. indicia, or the account was below the reporting threshold at the time of opening and exceeded it without obtaining a valid self-certification or other documentation. |
| 555555555 | New individual or entity accounts with U.S. indicia other than a U.S. place of birth. Similar to code 333333333, this applies in instances of a change in circumstances causing an incorrect or unreliable self-certification or documentation originally obtained at account opening, or when the account exceeded the threshold without obtaining a new self-certification. |
| 666666666 | Pre-existing entity accounts held by a passive non-financial foreign entity (NFFE) lacking self-certifications for controlling persons, with no identified U.S. indicia. |
| 777777777 | Dormant accounts, i.e., pre-existing accounts with no available TIN, remaining above the reporting threshold, and meeting the criteria of a 'dormant account' as defined in US Treasury Regulations. |
| 999999999 | Used when an FFI cannot obtain a TIN for any account, and none of the other TIN codes are applicable. It indicates that the FFI has diligently reviewed accounts without U.S. TINs and has applied TIN codes in good faith based on their assessment. |
It is important to note that The IRS system will still generate an error notification to indicate the entry is invalid when one of the above codes is used. The error notification will provide 120 days to correct the issues.
Further details on the TIN code applicability, can be found on the IRS FAQ site (Q6 under “Reporting” that can be found here).
IRS Emphasizes Reporting Obligations
Notice 2023-11 is another attempt by the IRS to enforce the FATCA regulation by facilitating greater reporting compliance and information sharing among multiple tax jurisdictions to strengthen its mission of assessing U.S. taxpayers’ adherence to their U.S. tax responsibilities.
Even though the notice provides a temporary relief to FFIs from being non-compliant in reporting accountholder information, it imposes a comprehensive analysis of pre-existing accounts with the ultimate objective of documenting any missing information with a 120 day deadline. Banks must be ready to undertake in-depth research and gap analysis, culminating in the acquisition of the necessary information from their clients in alignment with the specified requirements. Additionally, the regulator mandates enhanced electronic communication and recordkeeping efforts from banks as part of their obligations.
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- FATCA defines an FFI as any foreign entity engaged in banking, asset holding, or securities trading. Specified foreign financial assets subject to reporting encompass diverse accounts and non-account assets held for investment, including stocks, securities, and interests in foreign entities. Acting as enforcers, withholding agents, whether U.S. or foreign entities, hold control, receipt, or payment responsibilities for income subject to withholding.
- FATCA applies to U.S. persons (USPs), encompassing individuals who are residents or citizens of the U.S., estates located within the U.S. (excluding those abroad), domestic corporations, domestic partnerships, trusts subject to supervision by a U.S. court or controlled by a USP, clients who meet the Substantial Presence Test (SPT), and entities such as the District of Columbia, States, the U.S. government, and certain individuals holding US Visas.