What is FATCA and why is it important?

02 July, AtoZForex Thursday marked the end of a two-year period for compliance with the FATCA. Yet, do you know what is FATCA and why it is important? Granted by the Internal Revenue Service (IRS) of the United States, it is a US federal law to enforce all US persons and financial institutions to file every year a report about their non-US financial accounts. In a two year time span, the Financial Institutions reviewed and classified their pre-existing customer accounts, and recorded the FATCA classification code for their every internal system.

However, with the industry oversaturated with various regulations, including both tax-related and others, it is no wonder that some financial institutions have struggled to meet this two-year deadline.

What happens if you miss the FACTA deadline?

What is FATCA compliance and how does it work, these are the FAQs by investors globally. The cost of non-compliance for FATCA is high. From the last day of June, Foreign Financial Institutions (FFIs) without a validated FATCA classification code will default to a ‘withholding’ status. Foreign FIs carrying this status will be subject to a 30% withholding tax, which is payable to the IRS, on any US-sourced income like interest, dividends, royalties, premiums that were paid on or after 1st of July 2014.

The burden of non-compliance will increase from 1st of January 2017 when the 30% tax will also be subject to interest generating US securities or gross proceeds on the sale of dividends. Companies will also be required to withhold income payments from FFIs to foreign entities or individuals that are not compliant with FATCA from the 30th of June. This has posed to threats of regulatory fines to firms that are unable to comply.

What is FATCA degree of leniency?

Given the complexity of the regulation and its scale, there is likely to be some degree of leniency. Institutions will be able to demonstrate that all reasonable efforts to meet the classification deadline have been made, and that there is a plan in place to complete the exercise.

However, this shouldn’t be relied upon. Given the political nature of this FATCA regulation and the trend in high profile banking fines, upcoming months could result in some big surprises for non-compliant firms. No matter the taxing, non-compliant organisations should aim to complete their FATCA classification as soon as possible.

Also see: EU authorizes €150 bn Italian bank liquidity guarantee

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