The Foreign Account Tax Compliance Act (FATCA) was introduced by the United States in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act to prevent offshore tax evasion by US citizens and to improve tax compliance. Foreign Financial institutions (FFIs) will need to report to the IRS the US accounts they handle i.e., financial accounts held by U.S. taxpayers (even if they hold only non-U.S. assets) or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest or be subjected to 30% withholding tax on any US-sourced income and sales proceeds. The primary obligation of the participating FFIs is to identify the products and customers that fall under the scope of FATCA withholding and reporting.
Product assessment is required to analyze the products offered by financial institutions to its clients and to avoid unintended impact of FATCA on the product universe. The assessment validates the way a product is offered to a client, as FATCA impact on a product is based on the client’s location and generation of US-sourced Fixed, Annual, Determinable, Periodic (FDAP) income. This makes it necessary to evaluate the entire product base of all financial institutions.
The process begins with defining the product base of the financial institution and eliminating the inactive products from further assessment. This includes product data extraction and identification of the affected products for their respective line of business. Post identification of the products, the products will be validated for its income generating capability and its geo locations. As a result of this process a structured list of FATCA affected products are derived. Each business entity of a financial institution is assigned a FATCA status. Based on the status, the in-scope products are addressed depending upon their FATCA impact.