FATCA: The facts
It has been estimated that each year the U.S. treasury loses up to $100 billion to offshore tax noncompliance. FATCA (Foreign Account Tax Compliance Act) was enacted to make it harder for people to hide assets in offshore accounts and thereby recuperate some of the annual loss. FATCA was made law on March 18, 2010 and was implemented on July 1, 2014. Here are the basic provisions of FATCA.
1. Foreign Financial Institutions are required to disclose to the IRS information about their U.S. Citizens’ accounts such as names, addresses and transactions.
2. Holders of foreign accounts or assets must declare them on a new form, the 8938, which is filed with their U.S. tax returns if the accounts exceed $50,000. It is a regime that gives the U.S. treasury and IRS more power to combat tax evasion. Its stated purpose is to increase transparency of U.S. sourced income paid to those outside the U.S. and ensure appropriate taxes are paid.
The impact of FATCA will be major. Those foreign financial institutions that don’t comply with the IRS are subject to a 30% withholding tax on applicable transfers from U.S. financial institutions. This tax also applies to proceeds from the sale of relevant U.S. property. FATCA will also have an impact on other countries. If it proves to be a success, it is likely that other countries will enact similar legislation.
FATCA will not just impact on financial institutions. Many non-financial businesses will be required to comply. A ‘financial institution’ is a broad term, and entities such as non U.S. retirement funds, treasury centres and captive insurance companies may find themselves subject to FATCA.
FATCA: The opinions
FATCA has proved to be deeply controversial. Critics have called it ‘draconian’ and ‘devastating’. Opposition to the scheme was strong even before it was implemented. This opposition is proving to be international as foreign governments and financial institutions argue that the regime makes them ‘agents’ of the IRS.
Those who comply are laying the foundation for a global tax information sharing regime to the delight of international bureaucrats, it is claimed. It is reported that some international businesses are refusing to consider American job applicants due to IRS reporting requirements. Many U.S. citizens abroad have been ‘locked out’ of their banks in order to minimize reporting requirements and withholding fees.
U.S. expats are finding it hard to get financial advice and have a dwindling number of investment products to choose from as well as facing major increases in tax liabilities. Critics have declared that implementation of FATCA has been a disaster. They say the IRS are unprepared and incompetent and threaten to compromise the information of Americans and foreign institutions forced into ‘agreeing’ with them. Such critics claim that the scheme is unlawful while others say it is a violation of privacy and a bureaucratic nightmare.
There are those who point out the benefits of FATCA. They say it is part of a global crackdown which will succeed in the long term. It is part of ongoing Global progress in tax regulation which will eventually lead to advantages and savings for businesses. Compliance could lead to an enterprise wide system with the flexibility to deal with all reporting regulations due. They say it is a huge step forward in tax transparency and signals the end of the ‘tax haven’.