How FATCA Compliance Benefits from Subsidiary Entity Management

What is FATCA?

• The Foreign Account Tax Compliance Act (FATCA) compels U.S. taxpayers (people and entities) at home and abroad to file annual reports on any foreign account holdings.
• FATCA was endorsed in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act to promote transparency in the global financial services sector and to promote employment.
• By taxing foreign-held assets, the U.S. planned to use the revenue stream to put toward job stimulation following the 2008 Great Financial Crisis.
• Compliance involves registration with the Internal Revenue Service (IRS) where companies receive certain registration numbers. Annual filings that contain certain disclosures of accounts held by foreign subsidiaries are required. 
• Penalties are imposed on U.S. residents who do not report their foreign account holdings and assets that exceed $50,000 in value in any given year.
  

Policy Background

Following the 2008 financial crisis, the U.S. Congress passed the HIRE Act to increase employment. To fund the employment objectives of the HIRE Act, provisions were included to increase tax revenues from wealthy individuals and companies holding assets or funds overseas. These provisions were named the Foreign Account Tax Compliance Act or FATCA. 

FATCA requires all U.S. taxpayers (people and entities) to report yearly all assets held outside of the country so that they can be taxed. By taxing these foreign-held assets, the U.S. increases its revenue stream, which is put towards its incentive account for job stimulation. Penalties are imposed on U.S. residents who do not report their foreign account holdings and assets that exceed $50,000 in value in any given year.

Non-U.S. foreign financial institutions (FFI) and non-financial foreign entities (NFFE) are also required to comply with this law by disclosing the identities of U.S. citizens and the value of their assets held in their banks to the Internal Revenue Service (IRS) or the FATCA Intergovernmental Agreement (IGA). FFIs that do not comply with the IRS will not only be excluded from the U.S. market but will also have 30% of the amount of any withholdable payment deducted and withheld from them as a tax penalty. Withholdable payments in this instance refer to income generated from U.S. financial assets held by these banks and include interests, dividends, remunerations, wages and salaries, compensations, periodic profits, etc. FFIs and NFFEs that agree to the law must annually report the name, address, and tax identification number (TIN) of each account holder that meets the criteria of a U.S. citizen; the account number; the account balance; and any deposits and withdrawals on the account for the year.

What is a GIIN Number

A GIIN is a Global Intermediary Identification Number, consisting of 19 characters. GIINs are assigned by the FATCA registration system to financial institutions and direct-reporting non-financial entities. The complete list of the variety of reporting entities includes:

• Foreign financial institutions (FFIs).
• Financial institution (FI) branches.
• Direct reporting non-financial foreign entities (NFFEs).
• Sponsoring entities, sponsored entities and sponsored subsidiary branches.

These registered entities can use their official GIIN to identify themselves to withholding agents and tax administrators for FATCA reporting purposes.

The Component Parts

Now let's take a quick look at the pieces of your GIIN and what each number series actually represents. As we mentioned before, the GIIN is 19 characters long if you count the three decimal points. Those non-decimal characters each signify a different thing, depending on where they fall in the overall number sequence. So, a sample GIIN might look something like this:

123456.12345.12.12.123

The first six numbers will be your business entity's FATCA ID. This is a randomly generated alphanumeric series consisting of all upper-case characters. It is issued by the FATCA system when a FATCA account is created. This series will never contain the letter "O". Anything that looks like it might be an 'O' should be read as a zero (0). The FATCA ID is used with an access code to log in to the system and to identify the account for purposes of registration.

For FI branches, this number will be the FATCA ID of its associated FI.

For sponsored or sponsored subsidiary branches, this number will be their sponsoring entity's FATCA ID.

The next five digits represent your financial institution type. These, too, will be alphanumeric and always upper-case. As before, there should be no "O"s.

If your entity is a lead FI or a sponsoring entity, this number will always be 00000.

For single FIs, the number will be 99999.

For member FIs and sponsored entities, the financial type number consists of the last five numbers of their FATCA ID. For sponsored subsidiary branches, this series will be the same as their associated entity.The third set of digits is your entity's GIIN status code. These codes consist of abbreviations meant to represent the status of your entity within the FATCA system. 

These abbreviations are as follows:

• Lead financial institutions are represented by LE;
• Sponsoring entities become SP;
• Single FIs are SL;
• Member FIs are ME; and
• Branch FIs are represented as BR.
  

The final set of digits is a numeric code, which represents the country code for your financial institution or branch.

Why Are GIINs So Important?

GIINs are so important because they serve as a kind of fingerprint for each individual entity within the FATCA registry, allowing users to differentiate between entities quickly and easily. As such, they are used not just by the Internal Revenue Service (IRS) for registration and reporting purposes, but by other FFIs and U.S. withholding agents.

In order to avoid the withholding requirements on foreign accountholders, investors, shareholders or partners, your company needs to gather, review and maintain GIIN documentation. What's more, the IRS requires companies who have entered into FATCA agreements to reconcile all GIINs with their databases on a regular basis. In addition, any previously confirmed GIINs must be reconfirmed on a regular basis.

It is important to note that, in some instances, countries have opted to enter into an intergovernmental agreement (IGA) with the U.S. in order to satisfy their FATCA obligations. Countries may choose this route as a way of preventing their national companies from having to deal directly with the IRS. In such agreements, FFIs will report to their individual government agencies, which then pass on those reports to FATCA. The GIINs for companies whose country participates in an IGA may have a slightly different format from those listed traditionally.

Entity Management Software Helps You Maintain FATCA Compliance

Like so many other aspects of FATCA, the management of GIINs manifests itself not only as a tax reporting issue, but as part of the customer identification and verification process. If you are a corporation with multiple entities across the globe or a FI dealing with a wide array of U.S. taxpayer accountholders, then this prospect may be particularly fraught. As with other exercises of this nature, the classification and verification of each entity within an enterprise, or each entity with which an FI does business, can be a costly and time-consuming task.

Entity management software can help ease that burden by creating a single source of corporate data, including GIINs, which can be indexed and updated through a secure, easy-to-operate dashboard. In addition, wherever applicable, entity management software can create automated processes that can reconfirm the GIINs of affiliate entities and financial institutions.

This automation can save you time and money, and may keep you from having to pay the withholding penalties associated with FATCA.

‍