What is FATCA and How It Affects Businesses

Understanding FATCA

The FATCA meaning goes far beyond just a tax rule — it represents a major legislative initiative that has evolved into a global framework for combating tax evasion. The Foreign Account Tax Compliance Act (FATCA) was adopted by the U.S. government to promote honesty, transparency, and proper reporting of offshore assets. It has become an effective mechanism that now extends its influence to financial institutions around the globe and is gradually being implemented into the legislation of other countries.

What does FATCA stand for?

This law requires foreign financial institutions to identify and report to the Internal Revenue Service (IRS) any accounts associated with U.S. citizens. The act imposes a corresponding obligation on clearly defined categories of financial institutions to report relevant information to the responsible authority. FATCA also stipulates that certain categories of individuals must report periodically by submitting the relevant forms to the IRS. To ensure compliance with this law's provisions, the US has signed intergovernmental agreements (IGAs) with other countries. Under these agreements, banks and other specified financial institutions must check their clients for signs of a US connection and send relevant information to the appropriate authorities if any are found.

Purpose of the Foreign Account Tax Compliance Act

The law in question was adopted in 2010 in response to continued tax evasion by U.S. citizens holding assets abroad. The situation escalated when it was discovered that European banks were "helping" Americans avoid their tax obligations by allowing them to keep their assets in their accounts. According to an analysis conducted from 2008 to 2010, the estimated losses amounted to a staggering $458 billion USD. These losses caused legitimate concern, so a decision was made to require financial institutions to report and disclose the requested information to rectify the situation and prevent further losses.

FATCA Reporting Requirements

Who is required to report under FATCA

In short, it's way more people than you might initially think! FATCA disclosure requirements apply to individuals, legal entities, and financial institutions. For an individual to be subject to the legal obligations, certain conditions must be met. These include the presence of U.S. person (USP) status and achieving the relevant asset threshold. USP status is assigned to U.S. citizens or residents, green card holders, and trusts controlled by U.S. persons.

Among financial institutions, foreign financial institutions (FFIs) are distinguished. An FFI is any non-U.S. financial institution. They are "foreign" from the U.S. perspective. According to FATCA, financial institutions include depositary institutions, custodial institutions, investment entities, insurance companies, and holding companies for other FFIs.

Filing obligations and deadlines

So, what is the FATCA filing requirement? As mentioned above, FATCA reporting obligations apply to a wide range of individuals. The main criteria taken into account when deciding who is required to report under FATCA are: whether you own specific financial assets and threshold values based on your status.

Depending on your status and location, the thresholds generally range from $50,000 to $600,000. You must complete the so-called FATCA declaration (Form 8938) if you meet the reporting thresholds. This form is submitted with your annual tax return and requires detailed information about your foreign financial assets, such as account balances and income generated from those assets.

FATCA also has implications for foreign financial institutions. These institutions must disclose information about accounts held by U.S. taxpayers to the IRS.

FBAR vs FATCA reporting differences

Although these documents may seem similar, they serve different purposes. The FBAR (Foreign Bank Account Report) is an informational document; its main purpose is to ensure adequate monitoring by the state and prevent illegal activities and money laundering. FATCA, on the other hand, was created to find hidden foreign financial assets and ensure tax compliance. 

The authority to which the report is submitted differs as well: Form 8938 (FATCA) is an IRS form included in your income tax return, while the FBAR is submitted to the Financial Crimes Enforcement Network (FinCEN). While the FBAR requires reporting on foreign financial accounts, FATCA requires a broader list, including foreign stocks, mutual funds, and hedge funds. The FBAR has a single threshold of more than $10,000, and for FATCA, the starting threshold is $50,000, which can vary greatly.

Since these forms have different purposes, you often need to fill out both.

Penalties and Compliance

FATCA penalties for non-compliance

If you meet the established criteria, you are required to complete the appropriate form. Financial institutions and individuals who do not comply with the FATCA reporting requirements may face the following fines and penalties: 

• A $10,000 fine for each form not filed per year;

• Up to $50,000 for failing to file after being notified by the IRS of the filing requirements;

• An additional 40% penalty on any underpayment of "tax attributable to non-disclosed foreign financial assets."

  
  

Failure to comply with FATCA filing and reporting requirements can damage the reputation of financial institutions and individuals, resulting in a loss of trust among customers and business partners. Non-compliance may also result in increased scrutiny by tax authorities, potentially leading to audits, investigations, and enforcement action. In severe cases, non-compliance with these requirements may result in criminal prosecution for charges such as fraud, tax evasion, and money laundering.

How businesses ensure compliance

To comply with FATCA requirements, you need to follow a few simple steps. The key to achieving FATCA compliance within your business lies in establishing clear and transparent policies and procedures for identifying US accounts. At the same time, remember the importance of due diligence, which involves verifying customer information and regularly reviewing accounts. Reporting is a vital element of compliance, so make sure you always collect and store the necessary up-to-date data and documentation. Implementing internal control procedures, including audits, monitoring, and distribution of responsibilities, would also be useful. Regular training for your team on the nature of FATCA, its legal requirements and obligations, and the consequences of non-compliance is also worth considering.

FATCA declarations and record-keeping

The Foreign Account Tax Compliance Act requires FFIs to identify accounts held by "U.S. persons" or companies that have a significant number of U.S. beneficiaries. This includes:

1. Сollection of FATCA declarations and forms.

2. Due diligence (review documents when opening an account to identify "U.S. indicators").

3. Annual reporting. 

   
   

Another equally important tool is record-keeping. It is important to retain FATCA forms, KYC documents, and evidence of due diligence for at least six years after account closure or reporting. Always maintain standardized, complete documentation to demonstrate compliance with FATCA and CRS (Common Reporting Standard). 

Impact on Businesses

While FATCA's main objective is to fight tax evasion by US citizens, its rules impact how companies manage their daily operations, document management procedures, and risk management. FATCA has legal, operational, and financial implications, particularly for companies that operate in multiple countries. Therefore, it is important to consider these implications.

Operational and financial implications

In order to remain FATCA compliant, companies must invest in compliance, staff training, and technical solutions. This means investing in systems that can collect, store, and process customer information; integrate data with core banking systems; and automate report preparation for tax authorities. 

There are compliance costs, which include legal advisor services, external tax consultant services, regular staff training, implementation of new KYC/AML procedures, and constant procedure updates. Administrative obligations involve annual customer account reviews and updating forms, as well as preparing responses to requests from tax authorities. Another important element is associated with keeping records and documenting all actions to create an audit trail. 

Risk management and internal controls

First of all, it is important to understand that you may encounter a number of risks, including financial, operational, regulatory, and reputational challenges. Therefore, in order to control potential risks, it is necessary to implement effective management and internal control systems. To stay up to date, it is worth implementing the following measures:

• Appointment of a FATCA Officer or Compliance Manager responsible for compliance.

• Approval of an official compliance program with clear deadlines and designated responsibilities.

• Regular monitoring, internal auditing, and periodic review of policies.

  
  

International considerations for multi-country businesses

For companies operating in multiple countries, complying with FATCA becomes even more challenging. They must take into account differences in national rules, IGA models (Model 1 via local tax authorities and  Model 2 with direct IRS reporting), and adjust their processes for each jurisdiction accordingly. To avoid duplicate reporting and ensure consistent data collection, it is also important to align FATCA with the Common Reporting Standard (CRS).

As FATCA involves the transfer of personal financial data to the US, compliance with the GDPR or local privacy laws is essential. Multinational groups often appoint a global FATCA/CRS coordinator to standardise procedures, monitor legislative updates, and provide staff training across all entities.

FAQ on FATCA

What is FATCA?

This is a global tax compliance regime introduced by the United States. It requires banks and companies worldwide to identify customers with US ties and report on their financial accounts, ensuring transparency and combating tax evasion.

Who must report under FATCA?

Foreign financial institutions (banks, funds, and brokers), as well as certain non-financial foreign entities (NFFEs), must report. U.S. citizens with foreign financial assets above the established thresholds must also file Form 8938.

What are FATCA filing requirements?

FFIs must submit an annual report (Form 8966) containing data on accounts held by U.S. persons. U.S. individuals must submit Form 8938 with their tax returns if the value of their foreign assets exceeds the established threshold.

How does FATCA affect businesses?

Businesses must implement Know Your Customer (KYC) and due diligence procedures, collect W-8/W-9 forms, monitor customer status, and report. Failure to comply may result in a withholding tax on payments from the U.S. and penalties.

What is the difference between FBAR and FATCA?

Although both focus on foreign assets, they serve different purposes and require separate filings. FATCA covers a broader range of financial assets with higher thresholds, while the FBAR focuses specifically on bank and financial accounts with much lower thresholds.