Introduction:
The Foreign Account Tax Compliance Act (“FATCA”) is a United States federal law which was enacted under the “Hiring Incentives to Restore Employment Act” (“HIRE”) on March 18, 2010 by adding a new Chapter 4 (sections 1471-1474) to the Internal Revenue Code under Title V of HIRE.
FATCA is a major modification of the U.S. withholding tax system. Both corporations and individuals are taxed on a worldwide tax system under United States tax law. However, there is a problem with the enforcement of such international taxation. FATCA is enacted with a unique approach of solving this enforcement problem by creating a system of detection and reporting, with great penalties to act as deterrents. The main objective of FATCA is to raise…show more content… Also, 26 U.S.C. §§1471-1474 has been added which requires U.S. payors to withhold taxes on payments to FFIs and NFFE who have not complied with FATCA provisions of providing information to the IRS about their U.S. accounts. Similarly, 26 U.S.C § 1298(f) has been added requiring shareholders of a passive foreign investment company (PFIC) to report certain information. Many temporary and proposed regulations have been made since 2011 for individual taxpayers and financial…show more content… Department of Treasury released several model intergovernmental agreements (“IGAs”) to facilitate FATCA compliance in certain countries. Under the “Model 1” IGA approach, FFIs from the signatory countries are not required to sign an FFI agreement and report directly to the IRS, as the Model I countries propagate their own rules mandating such reports. In other words, these countries require the FFIs in their country to report to the local revenue authority, and the revenue authority then shares relevant information with the IRS. This Model 1 has two versions under it, namely, Model IA- under which the United States will also share information about the partner country’s taxpayers with the partner country; and Model IB- which is a nonreciprocal version.
Under the “Model II” IGA, the FFIs within the country are still required to sign FFI agreements with the IRS, however are relived of certain FATCA requirements, such as the obligation to close accounts of recalcitrant account holders. More than 30 nations have signed the IGAs with the U.S. and many other nations have reached agreements in substance , and are being treated by the Treasury as having an IGA in effect.
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