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FATCA Impact on Non-US Citizens

FATCA Impact on Non-US Citizens
Ines Zemelman, EA
06 August 2012

The HIRE Act (Hiring Incentives to Restore Employment) was passed by Congress in March of 2010. Essentially, it was passed to restore employment in order to stimulate growth out of a depression of the United States economy. Part of the HIRE Act, however, was a US tax code amendment which is known as Section 6038D, or FATCA (Foreign Accounts Tax Compliance Act). This act is intended to close the gap on international taxes, but it imposed a dubious tax on both US Citizens and businesses who are mandated to file a US tax return and foreign financial institutions.

The intention of this post is not to go into specific detail about FATCA, rather to raise awareness of this tax amendment. It is imperative that you familiarize yourself with these new rules and regulations, as failure to comply could result in huge penalties.

Foreign Operated U.S. Businesses

Numerous foreign operated US Businesses will be impacted in 2 ways, at least. First of all, most will have stateside employees, executives and trainees who all need informed the FATCA rules and regulations. Second, any offshore bank accounts which can be attributed to a stateside contribution are subject to taxation in the United States. It is not an irregular practice for stateside businesses which are owned by foreign people or establishments to hold a foreign financial account into which larger transfers are made from the United States. Another situation may include the US business making a ‘loan’ to the parent company in an overseas location, in which case the funds would be held for a specific amount of time. While the US Business may not hold a title over this foreign account, its contents may be considered foreign financial assets and become taxable under FATCA regulations. Additionally, the foreign corporation itself could be deemed a foreign financial institution and by default become subject to the rules and regulations of FATCA for registration and withholding purposes.

Non US Citizens Living and Performing Services in the United States

If a foreign national were to be assigned work in the United States and either became subject to the many rules and regulations regarding residency or acquired a permanent residence status; he/she would be required to file a US tax return, and thus become subject to FATCA withholdings claimed on Form 8938 beginning with the 2011 tax return. FATCA may also extend to unintentional citizenship, such as a case where non-US Citizen Parents gave birth to a child in the United States.

Foreign Pensions

Vested pension plans through foreign employers must not be overlooked this tax season. Whether or not you earn income through a domestic employer or you are paid salary from a foreign business, your having a pension fund with a parent foreign company could subject you to FATCA regulations and require you to file Form 8938. Depending on how many foreign accounts you have, you may also be required to file Form TDF 9022.1, FBAR.

Past and Present US Expatriate Employees

Just as FATCA may impose extra taxation on foreigners living in the United States, it can also impose upon US Citizens living abroad or who had lived abroad in the past and have invested into a pension fund which exceeds the required threshold for filing. If you have lived in a foreign country in the past and you are a US Citizen receiving benefits from a foreign pension fund, this income must be reported in Form 8938 and you may be required to file FBAR.

Ines Zemelman, EA
founder of Taxes for Expats