Introduction to FATCA Withholding Tax

The 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 these accounts to the IRS annually. Also, a FATCA withholding tax is applied on US source income such as dividends, interest, and so on, to non-participating FFIs, recalcitrant accounts and accounts with insufficient FATCA information.

In Temenos Transact, the FATCA module handles the identification of US accounts and the 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 customers into different groups are based on the account classification and 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	After defining the conditions 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 mutation (Change Pending) status. Withholding under FATCA is applicable on recalcitrant customers, non-participating financial institutions, dormant accounts and mutation cases. In the case of IGA countries, the withholding provisions are different as there are no withholding on recalcitrant customers. Groups can be created for recalcitrant, non-participating, dormant and mutation cases. If a match is not found in the `TAX.GEN.CONDITION` application based on the group definitions, the customers are assigned to a default group 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 the Change Pending Doc field is Yes, the customer is assigned to either the 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 withholding tax. The effective date of the withholding and the 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. The user can specify that the recalcitrant customers are subject to 30% withholding and US accounts are subject to zero tax.
Tax Posting	Withholding tax can either be deducted at source (by the custodian) or locally (by the bank). The settings in the `SC.WHT.SOURCE.LOCAL` application determines whether the withholding is at source or localyl. The records are created for all classifications that are subject to withholding (recalcitrant, dormant and 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 are instances where the withholding under Chapter 4 can be off-set by withholding done under other tax types. If the withholding has to be done at the 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, if the Tax Code field is set as 10 (pertains to `TAX` record - 10 with 10% tax), the withholding under FATCA is reduced to10. Alternatively, a tax rate can be specified for the depository (Tax Rate is set 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. Scenario1: 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. Scenario 2: ANC Corporation announces a cash dividend of USD 0.5 per share . 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 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 with 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 to process the adjustments. Adjustment entries are raised through a separate `FUNDS.TRANSFER` (FT) application. 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 `SC.PROCESS.WHT.ADJ` selector). This is particularly for the new transactions that were not taxed originally. These transactions 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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Introduction to FATCA Withholding Tax

Illustrating Model Parameters

Illustrating Model Products