FATCA is the Foreign Account Tax Compliance Act. The purpose and scope of FATCA are two-fold. The first intent is to deter businesses and civilians from evading U.S. taxation by hiding money and assets outside of the United States. The second intent is to detect when such tax evasions occur. In this article, we list a few tips that can help people better understand how to comply with FATCA’s reporting requirements.
The Focus on How
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How people hide money and how people create entities to hide money are two key tools that FATCA uses to spot tax evasion.
TIP: Tax evasion is not just about money. It is also about assets, business practices, and business procedures. Keep in mind that a business is a conglomerate of operations, and any one of those operations can change a legal off-shore business into a tax liability. “How” is an important consideration when it comes to complying with FATCA.
The structure of an offshore business is important. It is different when China imports a product to the United States. When you are a U.S. citizen with an offshore business, the setup of that business becomes a key concern for the IRS. Your offshore business has ties to you, and you are a U.S. citizen; you owe taxes on your offshore business’s revenues.
TIP: Legal entities have a very specific set of requirements that they must follow. The rules that dictate what a foreign entity is and what an offshore business entity is are critical. Even the slightest failure to comply leaves you and your business open for FATCA penalties.
That is true unless you have followed the legal entity structure to the extreme. How do you know if you have done all of that? A consulting company, such as Ruota Consulting, can help navigate and implement any requirements of the legislation.
Strategies for Variety
There are differences in how the rules of FATCA apply to individuals and businesses. For example, if you have an offshore asset or a foreign account, some, not all, of those accounts require that you report them to the IRS. Understanding how to set up an offshore account is important if you want to make sure that it meets the FATCA guidelines for an account that does not need reporting.
For businesses, the goal is legally avoiding the 30 percent withholding on payments to foreign entities. The big question is which payments qualify for the 30 percent withholding and which are exempt? The answer to that question comes down to the person or business that receives the money. If that entity is not required to document its activities under FATCA then the 30 percent withholding fee applies. Who owns the company or entity is also important and a determinant of how the 30 percent withholding penalty applies.
TIP: The best advice that anyone can give is to use an outside source to review your foreign investments and business setup, including the legal framework and structure of business, accounts, and investments.