Forex and FATCA

The Foreign Account Tax Compliance Act (FATCA) was enacted by the United States in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA was designed to target non-compliance by U.S. taxpayers using foreign accounts and to prevent offshore tax abuses.

FATCA imposes a number of reporting and withholding requirements on foreign financial institutions (FFIs). FFIs are required to identify and report information on U.S. account holders to the Internal Revenue Service (IRS). If they do not comply, they face a 30% withholding tax on U.S. source income. The administrative burden and potential penalties associated with FATCA compliance can be significant for FFIs.

As a result of these compliance challenges, some foreign brokers and securities dealers choose not to engage U.S. clients to avoid the regulatory burden. It's not necessarily that they can't engage U.S. clients; rather, it can be cost-prohibitive or administratively burdensome to do so.

FATCA regulations are part of a broader global trend towards increased transparency and information sharing in tax matters. While FATCA was primarily enacted to curb tax evasion by U.S. persons with foreign financial assets, its requirements have had a broad impact on global financial services and cross-border activities, including the operations of foreign brokers and securities dealers.

While FATCA has proven effective in certain respects, it also has its critics. Some argue that it places too great a burden on FFIs, infringes upon the sovereignty of other nations, and may discourage foreign investment in the U.S. due to the associated compliance burdens and costs.

Nonetheless, the goal behind FATCA, to prevent tax evasion and improve tax compliance, is widely recognized as crucial to maintaining the integrity of the international financial system. It represents one approach to addressing these complex issues.

When a Foreign Financial Institution (FFI) engages a U.S. client, there are several regulatory and compliance steps that the institution must take due to the Foreign Account Tax Compliance Act (FATCA), among other regulations. These include:

Identification: The FFI is required to identify which of its account holders are U.S. persons. This often involves examining account holder information and undertaking due diligence procedures to establish the U.S. status of its clients.

Reporting: If the client is a U.S. person, the FFI must report certain information about the client's account to the Internal Revenue Service (IRS). This includes the account holder's name, address, taxpayer identification number (TIN), account number, account balance, and income received in the account.

Withholding: In certain cases, the FFI may be required to withhold a 30% tax on U.S.-source income if the U.S. account holder is not compliant with their U.S. tax obligations or if the FFI itself is not compliant with its FATCA obligations.

Compliance: The FFI must establish a FATCA compliance program, ensuring they meet all the obligations required by the Act. This often includes appointing a responsible officer who certifies the institution's compliance to the IRS.

Non-compliance with FATCA regulations can result in the imposition of the 30% withholding tax on U.S. source income and potential penalties, which can be a significant financial burden for the FFI. Therefore, many FFIs enter into agreements with the U.S. government or comply with intergovernmental agreements (IGAs) between their home country and the U.S., ensuring they're compliant with FATCA. This is why some FFIs may choose not to engage U.S. clients to avoid these regulatory burdens and potential penalties.