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Foreign Account Tax Compliance Act (FATCA)


The Foreign Account Tax Compliance Act (FATCA) is a U.S. legislation enacted in 2010 to prevent tax evasion by U.S. citizens and residents through the use of offshore accounts. It requires foreign financial institutions to report information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers have a substantial ownership interest. Failure to comply may result in withholding of 30% of certain payments made from the U.S. to the non-compliant financial institution.


Foreign Account Tax Compliance Act (FATCA) can be phonetically transcribed as:Foreign – /ˈfɔr.ɪn/Account – /əˈkaʊnt/Tax – /tæks/Compliance – /kəmˈplaɪ.əns/Act – /ækt/FATCA – /’fætkə/

Key Takeaways

Top 3 Takeaways about Foreign Account Tax Compliance Act (FATCA)

  1. The Main Objective: FATCA is a United States federal law that primarily aims to prevent tax evasion by U.S. citizens and residents through the use of offshore accounts. Enforced by the Internal Revenue Service (IRS), FATCA requires foreign financial institutions to report account details of their U.S. clients.
  2. Impact on Foreign Financial Institutions: Foreign Financial Institutions (FFIs) must enter into an agreement with the IRS to identify any U.S. account holders and to disclose the account details. Failure to comply with FATCA’s reporting requirements can result in a 30% withholding tax on certain payments originating from the U.S. to the non-compliant FFI.
  3. Effects on U.S. Citizens and Residents: Under FATCA, U.S. taxpayers with specified foreign financial assets that meet a certain threshold must report those assets to the IRS. This is done through Form 8938, which is attached to the annual federal income tax return. Non-compliance can lead to heavy penalties.


The Foreign Account Tax Compliance Act (FATCA) is a crucial legislation in the realm of international finance and business as it requires foreign financial institutions and certain other non-financial foreign entities to report on the foreign assets held by their American account holders or be subject to withholding on withholdable payments. This law aids the U.S. government in identifying non-compliant entities and discourages tax evasion via offshore accounts. Therefore, FATCA has considerable implications for both financial institutions and U.S. citizens abroad, making it an important factor for any business or individual engaged in international financial activities. By ensuring transparency, promoting compliance, and creating a global standard, FATCA plays a significant role in international tax policies and practices.


The Foreign Account Tax Compliance Act (FATCA) was enacted by the United States in 2010 with the primary aim to deter tax evasion by U.S. taxpayers using foreign bank accounts. The Act imposes responsibilities on U.S. taxpayers about their foreign financial accounts and foreign assets. It also mandates foreign financial institutions to report about the financial accounts held by U.S. taxpayers, or foreign entities in which U.S. taxpayers hold a substantial ownership interest.The Act is used to achieve greater tax compliance by providing transparency over U.S. taxpayer’s offshore financial activities. Under FATCA, certain U.S. taxpayers who hold financial assets outside U.S. must report those assets to the Internal Revenue Service (IRS). It equally compels all non-U.S. financial institutions to search their records for suspected U.S clients, requiring them to disclose the identity of U.S. citizens, green-card holders, and businesses these clients may own. By implementing FATCA, the U.S government aims to restore integrity in the tax system by preventing offshore tax abuses.


1. HSBC Case: Global banking giant HSBC had to review and revise all its operating procedures and systems to meet the compliance requirements of FATCA. The bank had to spend a considerable amount of money and time to redesign its systems and processes to collect information on all its U.S-based account holders and report them to the IRS. HSBC also had to train its executives and employees to understand FATCA and its implications.2. UBS Group AG: Swiss multinational investment bank and financial services company UBS Group AG also faced significant implications due to FATCA. Like HSBC, UBS also had to overhaul its existing systems and implement new procedures to comply with FATCA regulations. This included identifying and providing information about their American clients to the US government.3. Expatriate Americans: FATCA has had a major impact on American expatriates living and working in foreign countries. For instance, an American citizen working in Germany would be required to report their German bank accounts and other financial assets to the IRS. Many foreign financial institutions, in turn, started to refuse service to Americans in order to avoid the burdensome reporting requirements, leading to financial exclusion for some American expats.

Frequently Asked Questions(FAQ)

What is the Foreign Account Tax Compliance Act (FATCA)?

The Foreign Account Tax Compliance Act (FATCA) is a United States federal law that requires all U.S. citizens, both at home and abroad, to file annual reports on any foreign account holdings. This legislation primarily aims to deter and prevent tax evasion by U.S. citizens and residents via foreign accounts.

Who is impacted by FATCA?

Both individuals and financial institutions are affected by FATCA. U.S. taxpayers who hold foreign financial assets with an aggregate value exceeding $50,000 must report it. Foreign Financial Institutions (FFIs) are also required to report directly to the IRS about their U.S. accounts.

What is the purpose of FATCA?

FATCA aims to increase transparency for the IRS with regards to U.S. citizens who hold foreign financial assets. The overall objective of FATCA is to detect, deter and discourage offshore tax abuses through increased reporting and enforced transparency.

What happens if you do not comply with FATCA?

Non-compliance with FATCA can result in a 30% withholding tax on certain U.S. source income and fines. For individual taxpayers, failure to report foreign financial assets on Form 8938 might result in a $10,000 fine, and penalties can go up to $50,000 for continued failure after IRS notifications.

What are the reporting obligations for financial institutions under FATCA?

Foreign financial institutions (FFIs) have to report account numbers, balances, names, addresses, and U.S. identification numbers. For U.S.-owned foreign entities, they need to report the name, address, and U.S. TIN of each substantial U.S. owner.

What is included as foreign assets?

Foreign assets include, but are not limited to, financial accounts held at foreign financial institutions, foreign stocks or securities not held in a financial account, foreign mutual funds, foreign-issued life insurance or annuity contract with a cash-value.

How does FATCA affect non-U.S. citizens?

Non-U.S. citizens may be affected if they have financial dealings with U.S. individuals or if they hold a joint account with a U.S. citizen. Additionally, non-compliant FFIs may be subject to withholding penalties on their U.S. sourced income.

Related Finance Terms

  • Inter-Governmental Agreements (IGAs)
  • Non-Financial Foreign Entities (NFFEs)
  • Foreign Financial Institutions (FFIs)
  • Withholding Agents
  • FATCA Compliance

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