The FSC approved today the Implementation Rules for the Korea-U.S. Tax Information Exchange Agreement, which will be implemented from July 1, 2014. The purpose of the rules is to provide a clear guideline with Korean financial institutions that come under reporting obligation of the Foreign Account Tax Compliance Act(FATCA) in order to relieve their compliance burden.
BACKGROUND: WHAT IS FATCA
The Foreign Account Tax Compliance Act(FATCA) was enacted in 2010 to target tax non-compliance by U.S. taxpayers with foreign accounts. FATCA requires foreign financial institutions(FFIs) to report to the Internal Revenue Service(IRS) information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. Non-compliant FFIs face a 30% withholding tax on certain U.S.-source payments made to them.
Governments around the world are signing intergovernmental agreements with the U.S. government to ease burden of their domestic financial institutions under FA TCA reporting obligation. Korea singed a bilateral agreement with the U.S. in March 2014 on automatic exchange of tax information. Under the bilateral tax deal, financial institutions are required to report their own country’s tax authorities – the National Tax Service(NTS) for Korean financial firms and the IRS for U.S. firms – information about their clients’ financial accounts. The NTS and the IRS will exchange such information in every September starting from 2015.
KEY CONTENTS OF THE IMPLEMENTATION RULES
1. Financial institutions and financial accounts subject to FATCA reporting obligation
- (FINANCIAL INSTITUTIONS)* depository institutions (e.g. banks, savings banks), custodial institutions (e.g. securities firms), investment entities (e.g. private equity funds), insurers
* Reporting requirement is relieved for certain small financial institutions and local financial firms whose customer base is primarily local.
- (FINANCIAL ACCOUNTS) depository account, custodial account, fund a count, insurance contract, annuity contract
* Savings products with tax benefits for a certain amount of annual deposits are exempted from reporting obligation.
2. Implementation procedure
(1) Identification of U.S.-related financial accounts
A financial institution is required to identify U.S.-related financial accounts through reviewing electronic records of financial accounts.
(2) Reporting account information
If a financial account is identified as U.S.-related, the financial institution is required to report the NTS information about the financial account – e.g. account holder’s name, account number, account balance, and interest payments.
* For accounts newly created by entities between July 1 and December 31 this year, the period of due diligence is deferred for up to 2 years, the same period applicable to financial accounts held by entities prior to July 1, 2014.
* Please refer to the attached PDF for details.