Introduction to FATCA Withholding Tax

Foreign Account Tax Compliance Act (FATCA) is a US Tax law that requires US citizens to report any foreign account holdings. It is a tax law designed at preventing US Tax payers from evading US Tax by holding income-producing assets through accounts at Foreign Financial institutions (FFIs). FFIs need to sign an agreement with the US IRS to be designated as Participating Financial institutions.

The FFIs identify US accounts and report such accounts to the IRS annually. Also, a FATCA withholding tax is applied on US source income such as dividends, interest etc. to non-participating FFIs, recalcitrant accounts and accounts where sufficient FATCA information is not provided.

In Temenos Transact, the FATCA module handles identification of US accounts and FATCA Withholding Tax module handles deduction of withholding tax from US source income.

Illustrating Model Parameters

The model parameters for the FATCA Withholding (FW) module are explained below:

Parameters	Description
Condition Priority	The CONDITION.PRIORITY application defines the conditions based on which the customers are classified into different groups for taxation purposes. The conditions can be based on any of the fields in the `CUSTOMER` (Residence, Nationality and so on) or FATCA.CUSTOMER.SUPPLEMENTARY.INFO applications. For withholding under FATCA, the Fatca Status and Change Pending fields from the FATCA.CUSTOMER.SUPPLEMENTARY.INFO application are included in condition priority, as the classification of the customers into different groups are based on account classification and also the mutation status
Tax	The TAX application defines the details regarding tax rates, the categories to which the tax needs to be posted and whether tax has to be posted in local currency or not.
General Tax Condition	Once the conditions are defined in the CONDITION.PRIORITY application, the user must create the various groups based on the above conditions. For FATCA, the grouping is based on the account classification (Fatca Status) and the mutation (Change Pending). Withholding under FATCA is applicable on recalcitrant customers, non-participating financial institutions, dormant accounts and mutation cases. In case of IGA countries, the withholding provisions are different as there are no withholding on recalcitrant customers. For FATCA, the groups can be created for RECALCITRANT, NON.PARTICIPATING, DORMANT and MUTATION cases. If match is not found in the TAX.GEN.CONDITION application based on the group definitions, the customers are assigned to a default group that are set for zero tax. So, the customers with classifications such as US.ACCOUNT, NON.US.ACCOUNT and PASSIVE.NFFE are assigned to the default group. If the Change Pending field is set to Yes, the customer is assigned to WHT-004. If the Fatca Status field is NON.PARTICIPATING and Change Pending Doc field is Yes, the customer is assigned to either 003 or 004 group, based on the priority set in the CONDITION.PRIORITY application.
Tax Types	The TAX.TYPE application specifies the high level definitions regarding the withholding tax. The effective date of the withholding and link to the FATCA.PARAMETER application are established in the TAX.TYPE application. A TAX.TYPE record needs to be created before proceeding with the other tax framework related setup.
Tax Type Condition	The link between the groups (TAX.GEN.CONDITION) and the tax rates (TAX) are established in the TAX.TYPE.CONDITION application. EXAMPLE: The user can specify that the recalcitrant customers are subject to 30% withholding and US accounts are subject to zero tax.
Tax Posting	The withholding tax can either be deducted at source (by the custodian) or locally (by the bank). Settings in the SC.WHT.SOURCE.LOCAL application determines whether the withholding is at source or local. The records are created for all classifications that are subject to withholding (RECALCITRANT, DORMANT, NON-PARTICIPATING). The default record (ALL) is used for classifications, for which no record exists in the SC.WHT.SOURCE.LOCAL application.
Tax Offset	Even though the withholding under Chapter 4 (FATCA) takes precedence over other withholding (for example, USQI), there could be instances where the withholding under Chapter 4 can be off-set by withholding done under other tax types. EXAMPLE: If the withholding has to be done at bank’s end for dormant customers and the same needs to be off-set by the QI withholding done by the custodian, the tax liability under FATCA is reduced to the extent of withholding applicable under other tax regimes. The off-set rates can be defined in the SC.WHT.SOURCE.LOCAL application (either the off-set rate or a reference to the TAX record where the off-set rate is defined). In the Tax Code field, a valid TAX record ID can be specified. For example, the Tax Code field is set as 10 (pertains to TAX record - 10 with 10% tax), the withholding under FATCA is reduced to this extent. Alternatively, a tax rate can be specified for the depository (Tax Rate as 10 instead of Tax Code), to which extent the withholding under FATCA is reduced (applied rate is 20%). Different tax rates can be specified for different depositories to denote the different tax pools. EXAMPLE: if the depository 100301 denotes a 10% tax pool, depository 100302 denotes a 15% tax pool and 100303 denotes a 20% tax pool, the off-set rates and the tax codes are set accordingly. Alternatively, tax pools can also be distinguished based on sub-accounts. EXAMPLE: A cash dividend of USD 0.5 per share is announced by ANC Corporation. If a dormant customer holds 5000 shares of the said stock, the dividend payable to the customer is USD 2500 on which 30% withholding applies. However, a withholding of 10% is already been applied under QI by the custodian. As a result, only a withholding of 20% needs to be levied under Chapter 4 (FATCA).
Adjustments for Over and Under Withholding	Any tax over withheld can be adjusted in accordance to a reimbursement procedure. Under the reimbursement procedure, the withholding agent may repay the amount of tax over withheld. The SC.WHT.ADJ.PARAM application is used to setup high level parameters for processing the adjustments. Any adjustment entries are raised through a separate FUNDS.TRANSFER (FT) transaction. The version, the FT transaction type and the OFS source records are all defined in the SC.WHT.ADJ.PARAM application. If the reimbursements are to be posted to a different internal account category to the original tax account, the reimbursement account category can be specified in the parameter. The adjustments can be done for: A specific transaction. Customer based on a date range. Customer for a given security in a date range. Customer for a given depository or sub-account. The selection criteria are specified in the SC.PROCESS.WHT.ADJ application. Date Type – Indicates whether the start date and end dates represent the ex-date, pay date or value date. The default value is ex-date. Over Under – Determines whether over or under withholding is being handled. The SC.ADJ.TXN.UPDATE application can also be manually created (without going through the selector - SC.PROCESS.WHT.ADJ). This is particularly for the new transactions that were not taxed originally. These can be manually input, so that the tax base application for consolidated reporting is updated by the system.

Illustrating Model Products

Model Products are not applicable for this module.

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