Archive for the ‘FATCA’ Category

FATCA: Foreign Account Tax Compliance Act

May 11th, 2014 1 comment


FATCA (Foreign Account Tax Compliance Act) is a measure passed in 2010 to ensure accurate tax reporting by foreign financial institutions (FFI) having US taxpayers as customers.  The law is designed to address the use of foreign or ‘off-shore’ accounts to avoid payment of US taxes, but its effect will be far broader than originally thought.  It has evolved into a global tax reporting network that will now include cooperation with foreign institutions and their governmental tax authorities.

FFI Reporting

The Act requires FFIs to report on the holdings, earnings and gains of US customers with accounts over $50,000, or face fines and sanctions from the US government.  This requirement had the immediate effect of FFIs choosing to ‘lock-out’ US customers to avoid the onerous reporting requirements.  The choice for FFIs was simple, become a reporting agent for the Internal Revenue Service, or face penalties and possible exclusion from the US controlled financial network.  To enforce the rule of identifying US account holders and account proceeds, FFIs who fail to make a good faith effort to comply will face a 30% withholding on US-sourced payments.   Not surprisingly, many FFIs simply opted to close the accounts of US citizens and avoid the reporting requirement altogether.

US Taxpayer Reporting

The US foreign account holder also has a reporting duty under FATCA for accounts valued over $50,000.  Foreign investments over that threshold must be reported on the annual tax return or risk a penalty of at least $10,000.  Failure to list the asset will result in a 40% tax surcharge if US taxes were avoided at any point.  Since FFIs are mandated to report US taxpayer identities, there will be a cross-checking system in place to enforce these rules.

The Impact of Intergovernmental Agreements

The administrative burden placed on FFIs has brought a few delays to implementing the FATCA rules, and in the meantime governments have been at work trying to find a means to work together directly.  Intergovernmental Agreements (IGA) have been established between the United States and a growing list of countries that will allow FFIs to report the information directly to their own government agency, who will in turn hand it over to the IRS.

Although many countries have been reluctant to sign these agreements, the role and influence of the US financial system has been difficult to resist.  In essence, this is the founding of a global tax reporting network that could eventually affect any account holder in the world, as all governments begin to see the opportunity to crack down on tax evasion.  The list of governments participating in an IGA can be found here:

FATCA Rules for Foreign Account Holders in the United States

Reflecting some of these tax information sharing agreements are changes to IRS Form 1042-S, which requires non-US citizens to report US sourced income subject to withholding.  Therefore, non-US banks must report gains by any account held in the US, even if the account holder is a foreign citizen.  In essence, this expansion of FATCA’s reach ensures that the IRS will eventually have access to any account information with ties to the US financial system, whether at home or abroad.

Recently, the IRS declared 2014 and 2015 as a transition period for FATCA, delaying some of the enforcement requirements and penalties, but this is a measure that continues to expand in its reach and application in global banking.

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