An Overview of FATCA: Foreign Account Tax Compliance Act

24 Mar 2022

The Federal Law Foreign Account Tax Compliance (FATCA) was introduced by the United States Department of Treasury (Treasury) and the U.S. Internal Revenue Service (IRS) in 2010. His primary objective is to combat tax evasion by the country’s taxpayers, but what is the relation between this law and the UAE government? On June 17th of 2015, it was signed a Bilateral Agreement between the Government of the United States of America and the United Arab Emirates Government to improve international tax compliance. This is called an Intergovernmental Agreement (IGA), which enables UAE financial institutions to report to the relevant UAE government authority, making it available to the U.S. government. The UAE IGA will apply to Financial Institutions (organizing under the law of UAE) and branches located in the UAE of non-UAE Financial Institutions. Nowadays, most Foreign Financial Institutions (FFIs) in the Middle East are adhering to the FATCA requirements because of the potential commercial, reputational and financial risks of non-compliance.

FATCA in Different Sectors

According to the US UAE IGA, there are two (2) types of categories:

  1. Reporting Financial Institutions: they should report the information specified in Article 2 of the UAE IGA concerning U.S. reportable Accounts to the UAE, reporting information concerning payments made to nonparticipating financial institutions to the UAE properly registering on the IRS FATCA registration after December 31st, 2014. Also, they must register on the IRS FATCA website.
  2. Non-Reporting Financial Institutions: they are generally not required to report information to the UAE, but they will need to deliver correctly completed U.S. tax forms or self-certification to the withholding agent to evade FATCA withholding on U.S. source payments to them.

In the case of non-US Entities that are not financial institutions, they are considered Non-Financial Foreign Entities (NFFEs). It exists as active or passive NFFEs. Active NFFEs may be required to provide certification of their active status on an IRS Form W-8 to withholding agents to avoid FATCA withholding on payments to it. Passive NFFEs may be required to report and disclose their ‘substantial US owners’ and certify their status as a passive NFFE on an IRS Form W-8 to avoid 30 percent FATCA withholding certain U.S. source payments to it.

Reporting Requirements and FATCA Registration  

The information that will be provided to the Internal Revenue Service is:

  • Name and residential address.
  • Taxpayer identification number or social security number of each U.S. affiliated account holder.
  • Account number and balance at a defined date.
  • Income and transactions.
  • For an Insurance Contract or an Annuity Contract, the total gross amount paid or credited to the Account Holder with respect to the account during the calendar year

Four steps need to be followed for FATCA registration:

  1. First, the user may register in the IRS online registration portal as a: single financial institution, a lead financial institution, a member financial institution, or a sponsoring entity.
  2. Second, the financial institution acting as a qualifying intermediary will complete the registration form.
  3. Third, once the information is completed, the worm will be submitted online.
  4. Finally, once the information is approved, the user will be issued a Global Intermediary Identification Number (GIIN).

Consequences for Non-Compliance

All the entities in UAE should ensure that it is fulfilling with US UAE IGA. They should determine if they are a Financial Institution or a Non- Financial Foreign Entity and follow the requirements specified in the US-UAE IGA. There are two procedures in the case of non-compliance with UAE IGA:

Minor and administrative errors: The U.S. Internal Revenue Service shall notify the UAE Ministry of Finance when an error is found. An example of a minor error could be data fields missing or incomplete. Penalties may apply. If the error is repetitive, this may lead to significant non-compliance.

Significant non-compliance: The UAE Ministry of Finance will be notified by the IRS, and the Ministry will apply domestic law for non-compliance. The intension provision of substantially incorrect information is a clear example of significant non-compliance. As a penalty, Financial Institutions would be obligatory to withhold 30 percent from U.S. source payments made to nonparticipating/non-complying financial institutions or non-complying account holders

The Common Reporting Standard (CRS)

The Organization for Economic Cooperation and Development (OECD) created the Common Reporting Standard (CSR), a global tax transparency initiative. It is also known as a ‘global FATCA system’. Approximately 100 jurisdictions have signed the CRS, such as Lebanon, Saudi Arabia, Qatar, and United Arab Emirates. The CRS is a reporting regime whose objective is to avoid tax evasion. It is used to gather information from financial institutions in participating countries. Then, the CRS will be reported to the tax authorities. Everyone who has a bank account in the local banks in UAE must complete the CRS Self-Certification form. If the information is not completed, the bank can even block an account, and it can only be unlocked when the client delivers the needed information. If there are any issues you can contact the tax lawyers in UAE.