New FATCA Reporting Obligations Applicable to Compensation—Action Required for 2011 Tax Returns

Originally published March 30, 2012

Keywords: Foreign Account Tax Compliance Act, FATCA, reporting obligations, tax returns, worldwide income, Internal Revenue Code, section 6038D, specified foreign financial asset, SFFA, Form 8938

The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010. One of the purposes of the new law was to strengthen enforcement of those US tax rules that provide for taxation of worldwide income (including income relating to another country's compensation programs) in response to the government's perception that US taxpayers were underreporting assets held outside of the United States.

FATCA added section 6038D to the Internal Revenue Code. The provisions of section 6038D, which are effective for tax returns filed for tax years beginning after 2010, require specified persons who have an interest in a specified foreign financial asset (SFFA) to attach to such persons' individual US tax returns (Form 1040; Form 1040-NR) certain information relating to such holdings. The reporting is to be done on Form 8938.

The definition of an SFFA is broad enough to include certain elements of compensation provided by companies to US taxpayers and very little definitive guidance has been issued as to the reporting requirements. Nonetheless, even though there are still many open questions relating to the reporting requirements, the obligation to report has not been suspended or deferred. The reporting obligation falls on the individual and the actual reporting is based on facts and circumstances that are unique to the individual.

A company has no reporting obligation even though it is likely that a significant portion of an employee's or director's non-US assets may come from, or be attributable to, compensation. Therefore, although companies have no obligation to do so, they may want to remind their employees and directors about the reporting obligations and provide them with some assistance in determining what types of company-provided compensation may need to be reported. It is important, however, for companies to avoid providing tax advice and for their employees and directors to consult their own tax advisors.

What is an SFFA?

For purposes of the new reporting rules, an "SFFA" is defined as (i) any financial account maintained by a foreign financial institution and (ii) any of the following assets that are held for investment and are not held in an account maintained by a US financial institution (Other SFFAs): (a)...