In May 2014, Indonesia reached an "in substance" Model 1 FATCA IGA with the United States. IGA stands for intergovernmental agreement and FATCA is the Foreign Account Tax Compliance Act which was enacted by the United States Congress back in 2010 to encourage tax compliance by US persons using non-US financial accounts.
The stated purpose of the law is “to clamp down on tax evasion and improve taxpayer compliance by giving the IRS new administrative tools to detect, deter, and discourage offshore tax abuses." FATCA is expected to raise $7.6 billion in tax revenue over a 10-year period.
FATCA is technically not a tax but a framework for exchange of financial information. It requires all financial institutions outside the US to transmit on a regular basis information about financial accounts held by US persons to the Internal Revenue Service (IRS). Financial Institutions that fail to comply could have certain US-source payments subject to 30 percent FATCA-related withholding.
What does FATCA really mean for Indonesian financial institutions? It means three things.
Firstly, they must register with the IRS directly. Secondly, they must take appropriate actions to know their customers. Thirdly, they must report the activity of US persons as required by local law.
What does FATCA mean for Americans in Indonesia? It means three things.
Firstly, it means that many Indonesian financial institutions are giving us a hard time to open accounts. Some are even turning us away, but those that welcome us are throwing W9 and W8 forms our way with no guidance on how they should be completed. Secondly, it means that you need to ensure that you are up to date with your US tax filings and that includes your Foreign Bank Account Reporting (otherwise known as FBARs) and the new FATCA Form 8938 which now forms a part of your regular tax returns to the IRS. Thirdly, for those who are not up to date with your US tax filings, it is time to consider one of the IRS' amnesty programs to avoid civil and criminal penalties.
Thanks to FATCA, the days of flying under the radar are now over. Indonesian financial institutions are required to perform due diligence procedures. Due diligence is required to identify accounts with certain US indicia or indicators which may suggest that account holders are US persons. Staff need to be trained and IT systems need to be implemented to identify clients US indicia which include but are not restricted to - US citizenship or permanent residence (ie a green card), US birth place, US residence address or US correspondence address, US phone number, standing instructions to transfer funds to an account maintained in the US, a Power of Attorney or signatory authority granted to a person with a US address, and an “in care of” address or “hold mail” address in the US.
Furthermore, companies and partnerships have to be checked intensively to see whether they are substantially owned by US persons.
If you have not yet done so, it is time to talk to your US qualified tax professional.
Derren Hayden Joseph EA, MA, MPhil (Econ), CDipFM (ACCA), BSc (Hons) was admitted to practice before the Internal Revenue Service (IRS) and is an associate member of the American Institute of CPAs.