What is a “FATCA Compliance Certificate”?

Many foreign banks and financial institutions have recently been asking customers for a “FATCA Compliance Certificate”.  The reason for the request is that your country and the US probably signed an agreement to implement the Foreign Account Tax Compliance Act (FATCA), which will allow automatic exchange of tax information between the two countries this year. FATCA is an important part of the US government’s effort to address tax evasion. FATCA is rapidly becoming the global standard in the effort to curtail offshore tax evasion.

FATCA REQUIREMENTS

Put simply, under FATCA, financial institutions will have to report accounts maintained by US tax payers. FATCA-compliant financial institutions in many countries are required to disclose details of their clients’ income, and if they are either residents of the US or financially connected to the US or have any tax residency in US. “US persons” very broadly includes US citizens, green card holders, customers with US addresses or phone numbers, customers with regular payments made to US payees, etc.

Under FATCA, financial institutions, including banks, deposit taking non-banking finance companies, mutual funds, private equity funds, custodians and life insurance companies, will have to maintain information about their customers, including name, address, tax identification number and in cases of individuals, even details such as place and date of birth.

Specifically in India, for example, many Indian banks and mutual funds have started warning customers who are believed to have foreign contacts for a FATCA Compliance Certificate.  Technically, there is no FATCA Compliance Certificate, per se.  Practically speaking, a FATCA Compliance Certificate simply refers to that indicates that the foreign account has been properly reported to US authorities.

FATCA requires financial institutions to carefully review the client records in order to identify foreign customers.  The bank review includes careful scrutiny of bank electronic databases, bank paper files of account records, and interviews of bank managers and relationship managers regarding customers’ foreign status.

If a customer is deemed foreign upon initial review, numerous other questions are to be raised by the financial institution and answered by the customer.  In addition, information and documentation may be required by the customer, such as self-certification forms stating residency and tax information of the customer.  Often, a foreign tax identification number, such as a US Social Security number, is solicited.  All of the foregoing documentation often constitutes a FATCA Compliance Certificate.  A FATCA Compliance Certificate cannot be applied for or acquired from the US government.  In the parlance of the US government and US tax law, a FATCA Compliance Certificate does not exist.

Absent receiving such a FATCA Compliance Certificate, many financial institutions have threatened to freeze or close accounts. In fact, our firm has fought against several financial institutions that have alleged noncompliance by customers and have frozen customers’ accounts, without notice or opportunity to cure.

If you get a FATCA letter, you should immediately speak with a US tax attorney to ascertain your US tax compliance. Several voluntary disclosure solutions are available to noncompliant persons in order to clean up any instances of delinquent or failure to file tax returns.  Most importantly, noncompliant persons must clean up their noncompliance mess before the government finds them, after which it is too late.

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