WHAT IS FATCA?
Enacted March 18, 2010, as part of the HIRE Act, the Foreign Account
WHY INCREASE REPORTING REQUIREMENTS?
Essentially, the U.S.
HOW DOES FATCA WORK?
FATCA reporting must be made on Form 8938 and attached to the federal income tax return. But it's not only the individual taxpayer who has a reporting obligation. Financial institutions must also report to the IRS information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold substantial ownership interest.
In addition, FATCA requires non-U.S. financial institutions to withhold U.S. tax from certain sales and transfers involving a non-compliant, non-U.S. financial institution or a person who has not provided information showing he or she is a U.S. taxpayer. Failure to do so can also result in penalties. You can run, but you can't hide!
HOW ARE STOCK PLAN ADMINISTRATORS AFFECTED BY FATCA?
FATCA applies to anyone who is elected to be taxed as a U.S. resident. It also applies to those who participate in an equity compensation, pension, deferred compensation or other compensation plan sponsored or granted by a non-U.S. employer or non-U.S. parent or holding company.
FFIs can be subject to a 30% withholding tax if they fail to report any U.S. accounts and must enter into an agreement with the IRS to become a participating foreign financial institution to avoid these penalties. NFFEs, such as employers that offer stock compensation, must also disclose substantial U.S. owners or certify that none exist.
These regulations mean that stock plan administration will become somewhat more complicated, since administrators are now required to track and report on the non-U.S. assets of U.S. taxpayers under their plans and ensure these taxpayers are informed about their new obligations to report.
Much of the FATCA-related burden falls on stock plan administrators, who become the primary data collectors for much of the FATCA reporting information. They face new challenges, especially when tracking mobile global employees who may move in and out of foreign jurisdictions. This could extend the tax return process significantly, and may require application for tax return deadline extensions. Essentially, FATCA means a lot more paperwork that, if ignored, could result in tens of thousands of dollars in penalties.