The Foreign Account Tax Compliance Act (the “FATCA”) is a U.S. tax legislation enacted in March 2010, having an objective to enhance the efficiency of tax collection from U.S. taxpayers; particularly income derived outside the U.S.
Principally, the FATCA empowers the U.S. Internal Revenue Service (the “IRS”) to acquire information in regard to income belonging to U.S. citizens, including U.S. owned foreign entities,1outside the U.S. by imposing duty on Foreign Financial Institutions (“FFIs”) to report or disclose information of its U.S. customers including to withhold tax on withholdable payments and remit to the IRS. The implementation of this law is scheduled to begin on 1 July 2014.
Impact of FATCA
In this regime, FFIs, as described under the FATCA, can be classified into five categories: (a) Depository Institution; (b) Custodial Institution; (c) Investment Entity; (d) Specified Insurance Company; and (e) certain Holding Companies and Treasury Center. These mentioned FFIs would be affected directly since FATCA imposes an obligation on FFIs to comply with the requirements under the FATCA. FFIs failing to comply will be regarded as Non-Participating FFIs (“NPFFI”) and subject to 30 percent withholding tax on certain U.S. sourcedincome it may receive e.g. interest, dividends, premiums, annuities, and other fixed, determinable, annual, or periodic income.
Requirements under FATCA
To avoid being subject to withholding tax on U.S. sourced income, FFIs may enter into an agreement with the IRS (the “FFI Agreement”) and register with the IRS to become a Participating FFI (“PFFI”) or the government may enter into an Intergovernmental Agreement (“IGA”) with IRS and the PFFIs comply with the rules and conditions under the law or regulations to be released pursuant to the IGA.1 The most notable requirements PFFIs must abide by are as follows:
- Conduct the due diligence detailed in the FFI Agreement for identification of status and documentation of the account holders of each account and of the certain payees e.g. beneficial owner of the income;
- Deduct and withhold tax equal to 30 percent from any withholdable payment1 made to U.S. recalcitrant accounts1 the PFFI maintains, and remit the withheld tax under the rules and conditions set out in the FFI Agreement; and
- Annually report the information of certain specific payees with respect to the accounts of U.S. tax payers and certain aggregate information regarding accounts held by recalcitrant account holders.
Current Situation in Thailand
The Thai government has set up an operations team to work with the IRS to comply with the FATCA. However, most of the financial institutions in Thailand have already registered with the IRS directly to avoid withholding tax risks.
For more information contact Siam Premier International Law Office Limited directly.
By Praphan Phichaiwatkomol (Partner), Krittiya Wuddhihiranpreeda (Associate), and Nada Songsasean (Associate) © July 2014
Khun Praphan can be reached at Praphan@siampremier.com