An Overview Of The Foreign Account Compliance Act

The Foreign Account Compliance Act (‘FATCA’) is legislation of the United States of America, passed in March 2010 by the US Congress. FATCA is a mechanism for the US Inland Revenue Service (‘IRS’) to counter tax evasion. Its far-reaching effects are already being felt in New Zealand

On 12 June 2014, the New Zealand and US Governments entered into an intergovernmental agreement (‘IGA’), whereby the NZ Government agreed to implement legislative changes to pave the way for FATCA compliance by NZ institutions. The IGA and FATCA then became NZ law on 30 June 2014, through amendment to the Tax Administration Act 1994.

FATCA requires US citizens or tax residents to report certain foreign assets to the IRS. It also requires foreign financial institutions (a ‘FFI’) to report on assets they hold on behalf of US citizens, tax residents and some other US entities. These reporting requirements are intended to act as a cross checking mechanism for the IRS to combat tax evasion.

Under the IGA, there are some NZ specific exemptions from FATCA’s reporting requirements, such as registered charitable organisations. There are also some limited exemptions from the definition of FFIs, such as FFIs with only low value accounts. FFIs will not be required to report on some accounts held by US taxpayers where the value of the assets held does not meet an applicable threshold. For example, a standard bank deposit account held by a US taxpayer with a balance of less than US$50,000 or the equivalent in NZ dollars will not need to be reported on.

However, in the absence of an exemption, a wide range of institutions are subject to FATCA’s reporting requirements: banks, insurance companies and private equity firms, amongst others.

NZ FFIs that are subject to FATCA reporting requirements will need to achieve “Complying FFI” status. Where an FFI does not achieve this status, it will be subject to a 30% withholding tax on a number of different US-sourced revenue streams – for example, distributions of interest or sale proceeds.

Moving forward, the NZ Inland Revenue Department (‘IRD’) will provide a secure electronic system for sending and receiving FATCA reporting from NZ FFIs to the IRS. This will save FFIs from having to each deal with the IRS directly.

NZ FFIs have been collecting data for reporting since 1 July 2014, and will start providing FATCA reports to the IRD from 1 April 2015. The final date for exchange of first year reporting between the IRD and IRS will be 30 September 2015, at which time NZ FFIs will need to have provided their first year’s FATCA reporting to the IRD.

FATCA has already had, and will continue to have, implications for US citizens, US tax residents and FFIs alike. Should you have any concerns as to its implications for you or an institution you are involved with, we recommend that you contact us in conjunction with your tax specialist.