FATCA is one of the most important pieces of tax legislation to come along in years — and prepping for compliance with its provisions has become a major project for operations professionals in the fund industry.
Are you familiar with FATCA? Take our quiz and find out. (Answers are below.)
The FATCA Quiz
1. What does FATCA stand for?
2. Why was FATCA enacted?
3. FATCA encourages compliance through a “big stick,” rather than a carrot. What is the big stick?
4. A recalcitrant investor has bought a stock for $40 and sells it for $50. In the same period, the investor received $6 in dividends and $4 in interest. What are the FATCA consequences for the investor?
5. What is an FFI?
6. Which of the following is not an entity type recognized by the IRS?
a. Participating FFI
b. Non-participating FFI
c. Registered deemed-compliant FFI
d. Publicly traded NFFE
e. Excepted start-up company
f. Excepted PFIC
g. Foreign central bank of issue
7. What happens on January 1, 2014?
a. FFIs begin to register online with the IRS
b. Deadline for certification of completion of due diligence on accounts over $1 million
c. Withholding begins on dividends and interest
d. Withholding begins on gross proceeds from sale of securities
e. Withholding begins on foreign passthrough payments
8. What is the role of an FFI’s “responsible officer”?
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1. In the financial industry, FATCA means Foreign Account Tax Compliance Act. For airlines, it’s the Federation of Air Traffic Controllers’ Associations — though the professional organization is technically IFATCA, with the “I” for “International.”
2. To make it difficult for U.S. citizens to evade taxes by placing assets in offshore accounts.
3. FATCA imposes 30% tax withholding on U.S. source payments to parties not complying with FATCA. The withholding applies to dividends, interest and gross proceeds from the sale of securities.
4. In total, $18 will be withheld from payments to the investor: 30% of the $6 in dividends ($1.80), 30% of the $4 in interest ($1.20) and 30% of the $50 received for selling the stock ($15). Note that the withholding applies to the full amount of the proceeds of the sale, not just to the capital gain.
5. A foreign financial institution. The definition is very broad and includes any non-U.S. entity that accepts deposits, holds financial assets for others or engages in investing or trading.
6. “Excepted PFIC” is not a FATCA entity type. An NFFE is a “non-financial foreign entity.” This list of entity types is from the recently-released IRS Form W-8BEN-E, “Certificate of Status of Beneficial Owner for United States Tax Withholding (Entities)”. PwC counts 58 different entity types in FATCA.
7. Withholding on dividends and interests begins on January 1, 2014. Dates associated with other items:
a. January 1, 2013
b. July 1, 2014
d. January 1, 2015
e. January 1, 2017
8. The responsible officer must certify, under penalty of perjury, that no one at the FFI has helped clients avoid U.S. tax.