International Financial Systems

In foreign countries, the financial institutions that accept deposits, have regular financial activities and financial business with the US citizens that reside abroad are considered to be the FFIs’. They also include the non-US entities that have substantial business, hold financial assets, are engaged in the business such as investing, reinvesting, trading securities, hold partnership interests, commodities, or any interest the same, are FFIs.

The inclusions of FFI are listed out as-

Banks, Brokers and dealers, insurance companies, hedge funds, securitization vehicles, and private equity funds.

There are certain entities that are exempted from being an FFI even when they are having businesses with the off-shore US citizens. They could be termed as –

-Most governmental entities.
-Most non-profit organizations.
-Certain small and local financial institutions.
-Certain retirement institutions.

All the financial entities, withholding foreign trusts, and intermediaries were asked to have an agreement signed with the IRS in order to show their compliance with the newly passed law. Those non-financial entities and the FFIs were out of those who had to get into an agreement to show their support in the law. In the year of 2014, the agreements with Revenue Procedure 2014 – 2039 for the qualified intermediaries, withholding foreign trusts and withholding foreign partnership. It was so for there were modified requirements in the FATCA and Chapter 03 of the Internal Revenue Code.

But what is this FFI agreement?

The agreement is entered between the FFI and the US Treasury which would help these institutions to avoid withholding on the payments received in the form of tax. It would include these institutions to determine the United States Accounts that exist with the financial institutions. It would include an annual reporting to the US along with proper investigation as well as following due procedures in determining the same. It would also require these FFIs’ to comply with the reporting requests laid by the IRS and provide the withholding 30% tax wherever applicable, like recalcitrant account holder, non-participating FFIs’ and electing FFIs.

Once an institution has come into an agreement, the FFI is supposed to inform the following information to the IRS: –

• Name, address, and Taxpayer Identification Number (TIN) of the account holders of the United States Citizens.
• In the case of the United States owned foreign entity, name, address, and Taxpayer Identification Number of accounts of all the owners of that entity needs to be shared.
• The account numbers.
• Their account balance and year-end value.
• Details of gross dividends, interests, and other incomes to be paid or get credited.

Alongside, the financial institutions would be provided with a form, Form 1099, to be submitted to the IRS timely with the details of the account holders that could be specified as the United States persons or the United States owned entities. These institutions were not asked to report the gross receipts and payments or withdrawals in the first year, the year 2013. However, a report was asked to be submitted by June 30, 2014, when all the required information of any account holder listed in the Section 1471(c)(1) could not be obtained.

For an institution to register itself, these financial institutions are asked to register themselves on “FATCA Registration Website.” They receive an approval post registration was a Global Intermediary Identification Number (GIIN) from the IRS before that FFI is treated as a Limited FFI. It could also be done on paper but has not been widely recommended.  The website would be a source to registration and also, a hub of information for the unknowns and the amateurs. It would be accessible 24 hours and ensure complete security to the institutions. To do the needful and share a share from their end, the IRS decided to update a monthly document with updated institutions and a list of their GIIN for better records and maintaining a proper track of all the registrations.

There was an announcement made for the registration as well, that guided these institutions via the Notice 2011-53. It stated that all the FFIs’ that registered themselves by June 30, 2013, were considered as the participating FFI and were exempted from the chargeable withholding applicable from January 01, 2014. There was a levy on the FFIs’ that wanted to register post-deadline. It was not exactly a levy but it helped them be considered as a participating FFI even after registering after the due date. This is how. The FFIs’ that registered themselves with IRS after June 30, 2013, but before January 01, 2014 would still be considered as a participating FFI for 2014. However, they would be prone to a withholding penalty for not being rectified as a participating FFI before the penalty started on January 01, 2014.