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Understanding the Impact of FATCA on Global Taxation

The United States maintains a unique global taxation policy, taxing its citizens and residents on income earned anywhere in the world.

The United States remains unique in its global taxation policy, imposing taxes on its citizens and residents for income earned worldwide. 

Alongside the US, only the Philippines, North Korea, and Eritrea adopt similar global income tax policies for their citizens and residents.

Obligations for US Citizens Residing Overseas:

US citizens abroad must file tax returns annually with the Internal Revenue Service (IRS). Additionally, disclosure of foreign accounts to the US Treasury Department is mandatory for US taxpayers holding such accounts.

Implemented in 2010, the Foreign Account Tax Compliance Act (FATCA) aims to prevent tax evasion. It requires foreign financial institutions (FFIs) to divulge details about financial accounts held by US taxpayers or foreign entities with significant US taxpayer ownership.

Scope of FATCA and Reportable Entities:

FATCA encompasses various entities, including US citizens, residents, entities considered US taxpayers and non-US entities substantially owned by US taxpayers. Financial institutions like banks, mutual funds, and investment entities fall within its purview.

Certain entities, such as governmental bodies, non-profits, specific local financial institutions, and retirement entities, are exempt from FATCA requirements. 

FFIs can transmit information directly to the IRS or via intergovernmental agreements (IGAs) established with relevant countries.

US-UAE IGA and Compliance in the UAE:

The UAE signed an IGA with the US in 2015, necessitating adherence to FATCA regulations. Financial institutions (FIs) and non-financial foreign entities (NFFEs) operating within the UAE must comply.

Classification of Entities under the US-UAE IGA:

FIs are categorized as reporting and non-reporting FIs, with reporting FIs obligated to identify and report information about US account holders.

NFFEs are divided into active and passive categories, with only passive NFFEs subject to FATCA requirements.

Regulated entities fall under the supervision of respective regulatory bodies, with entities in free zones and under economic department jurisdiction managed by relevant authorities for FATCA compliance.

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