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FATCA Update – What does FATCA mean for Southpac trusts?

What does FATCA mean for clients with offshore trusts administered by Southpac? Sean Reeves, Director of Client Services for Southpac Trust Limited (Cook Islands), provided this information through Southpac’s newsletter.

By Sean Reeves, Southpac Trust Limited

FATCAFATCA (Foreign Account Tax Compliance Act) forms an integral part of the HIRE Act (Hiring Incentives to Restore Employment Act) adopted by the US Congress and signed into law by President Barack Obama on 18 March 2010.

The primary objective of FATCA is to combat tax evasion by US Persons. FATCA places the onus on banking and financial institutions worldwide to identify and report information on US Persons to the IRS. Any US Persons who do not consent to their identity and information being reported will be qualified as non- compliant or recalcitrant, and a 30% withholding tax will be applied to every US source income or gross proceeds from the disposal of US assets.

How does this affect Southpac Trust?

As Southpac Trust falls within the definition of a Foreign Financial Institution (FFI) under the FATCA regulations it has had to register as an FFI and has been assigned a Global Intermediary Identification Number (GIIN). Most foreign trust companies and banks will be classified as FFIs and will have to register under FATCA and also be assigned their individual GIIN numbers. A GIIN number will be used to report information on US taxpayers to the IRS A GIIN number is unique to each FFI.

Southpac LogoAll trusts established in the Cook Islands and Nevis also fall within the definition of FFIs under FATCA. Southpac Trust in both the Cook Islands and Nevis has decided to register under FATCA as what is known as a “Sponsoring FFI “ which means that it will assume all due diligence , reporting and withholding obligations of each of the trusts that it is the professional trustee of. Each of the trusts will in turn have the FATCA status of a “Sponsored FFI”.

As a Sponsoring FFI, Southpac in the Cook Islands will report directly to the IRS.

In Nevis however, the Nevis government is currently negotiating a Model 1 Inter – Governmental Agreement (IGA) for FATCA which means that our Southpac office in Nevis will report directly to the Nevis Tax authority for FATCA.

What do you as a Settlor have to do?

At this stage please be assured that if you have been reporting your foreign Grantor trust to the IRS on your annual tax return, FATCA will have almost no effect on you. Southpac may have to obtain from you additional information to clarify your US tax person status, but all reporting forms will be prepared by Southpac and set by us to the IRS.

Please do not register or attempt to register your trust for FATCA with the IRS as this is unnecessary and could cause confusion within the IRS .Your trust is a Sponsored FFI and Southpac will represent you.

How does FATCA affect your LLC or International Company?

Most Cook Island and Nevis LLCs and International Companies will not be classified as FFIs for FATCA. Instead they will have the FATCA status of Non-Financial Foreign Entities (NFFEs) and will not have to register with the IRS. Southpac will still have to complete some degree of reporting for each LLC or International Company.

If however an LLC is non-financial in its nature a careful analysis will have to be made to assess whether it is actually a FFI. If so it will need to be registered for FATCA.

What information does Southpac Report to the IRS?

Southpac as your Sponsoring FFI will report the following information to the IRS:

1. The full names of the Settlors of every trust.

2. The address of each Settlor.

3. US TIN number (where applicable).

4. Name and GIIN number of Southpac.

5. Account balance at the end of the calendar year.

Please do not hesitate to contact Southpac should you have any questions whatsoever about FATCA.

Donlevy-Rosen & Rosen, P.A. recommends that clients with questions about their own FATCA compliance contact their CPA.