Apr 2012 | FATCA - US Act extends to reporting for trusts, Irish Revenue is now in discussion with IRS

The goal of the controversial new US regime brought in under the Foreign Account Tax Compliance Act (FATCA) is to reduce tax leakage to ensure the Inland Revenue Service (‘IRS’) can identify and collect the appropriate tax from US persons holding financial assets outside the US. In practice FATCA involves a far reaching disclosure and reporting regime, which will impact the payments made and received by US payers and foreign recipients respectively. The Act has been criticised because of compliance costs and also because it may conflict with local  data protection legislation.  

FATCA requires foreign entities to report American clients' dealings to the IRS. They must also block payments to US clients and to other banks if ordered to do so by the IRS. Failure to comply will result in a withholding tax on US sourced earnings.

FATCA applies to any entity with US clients or assets which provide US source income. The provisions will impose a 30% withholding tax on certain US source payments, made to foreign financial institutions (‘FFIs’) and non-financial foreign entities (‘NFFEs’) that fail to identify certain U.S. investors even if such US persons directly or indirectly hold only non-US assets. If an entity does not fall into the definition of FFI in the legislation but holds US assets or has US investors, it will be treated as a non-financial foreign entity (‘NFFE’). 

FATCA can extend to trusts and trust companies and does not appear to exclude 'small family trusts'. Therefore they would be considered FFIs (foreign financial institutions) for compliance purposes, albeit some may be considered 'deemed compliant' FFIs. Care should also be taken for charities holding US investments as the FATCA rules could apply to them.

Following the issue of the Joint Statement by the US and a number of EU countries, a spokesperson for the Irish Revenue Commissioners has confirmed that they are in contact with the US Treasury and discussions are ongoing. It was confirmed that any agreed approach would be based on domestic tax reporting legislation and automatic exchange of information under existing bilateral tax treaties. In this way it is expected that Irish data protection law will be bypassed. The US Treasury has frameworks in place now for the UK, France, Germany, Italy and Spain where 'FATCA partners' will agree with the US to collect information from financial institutions and automatically forward this to the IRS in exchange for which there will not be automatic withholding under FATCA (and indeed where there will be reciprocity in the US reporting to the relevant EU country on deposits held in the US by European residents). This will to some extent reduce costs and simplify the compliance effort.

It is clear FATCA will place a significant compliance and reporting burden on any trust caught by the definition of FFI or NFFE. Trusts to which FATCA applies must identify, document and report on US persons as required under FATCA or face a punitive withholding tax cost, which will be irrecoverable. In light of this there are numerous strategic and operational decisions which will need to be considered and planned.

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Aileen Keogan | Solicitor & Tax Consultant | 21 The Avenue | Louisa Valley | Leixlip | Co. Kildare | Ireland

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