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FATCA Pacts with US Grow as Law Takes Effect

Jul 2nd 2014
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On the day the Foreign Account Tax Compliance Act (FATCA) went into effect, the US Treasury Department said nearly 100 jurisdictions and more than 80,000 financial institutions worldwide now have agreements with the United States to fight overseas tax evasion.

“Over the past several years, FATCA has become the global standard in combatting international tax evasion and promoting transparency, and today this important initiative goes into effect,” Robert Stack, Treasury deputy assistant secretary for international tax affairs, said in a statement on Tuesday. “The international support for FATCA is without question. We will continue to work with our international partners in our efforts to crack down on international tax evasion and create a fairer and more transparent global tax system.”

Enacted by Congress in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, FATCA went into effect on July 1. The law requires foreign financial institutions to report information about accounts held by US taxpayers to the IRS, even if the accounts hold only foreign assets. If a bank refuses to disclose the information, it would be subject to a 30 percent withholding tax on certain US source income payments.

“In general, US taxpayers are taxed on a worldwide basis, meaning that they are fully taxable on their income from both within and outside of the United States,” said Thomas Long, senior tax analyst with the Tax and Accounting Business of Thomson Reuters. “FATCA is intended to better allow the United States to keep track of US taxpayers’ foreign accounts and collect taxes owed thereon, and also provide greater transparency in the banking industry worldwide. FATCA requires withholding agents to withhold 30 percent of certain payments to a foreign financial institution unless it has entered into an agreement with the IRS to, among other things, report certain information with respect to US accounts. The withholding rules are essentially a mechanism to enforce new reporting requirements.”

FATCA has triggered complaints in many countries that claim it violates privacy and banking secrecy laws. Tax havens such as Switzerland and the Cayman Islands have long-been identified as places where US citizens can stash funds without any fear of retribution. However, both jurisdictions have signed FATCA agreements with the United States.

“The importance of FATCA is not just that we’ll be collecting more money. It is also important because the average taxpayer has to be confident that, while they are paying their taxes, the very wealthy, with fancy lawyers and accountants, are no longer able to hide their money in foreign countries and avoid paying their fair share to support the operations of the government,” IRS Commissioner John Koskinen said in April.

Long also noted that FATCA has been criticized for imposing huge burdens on financial institutions in such areas as recordkeeping and reporting.

“The new requirements have essentially required many institutions to completely overhaul their systems, and the IRS has continued to release new forms and guidance up until the last minute, adding both complexity and time pressure to an already difficult situation,” he said.

A Flurry of Agreements
To improve compliance within the global community, the Treasury Department has been negotiating a series of intergovernmental agreements with countries to help the United States implement the law.

“These agreements represent an alternate means to implement FATCA that address difficulties with foreign tax laws that may prevent foreign financial institutions from complying with the terms of a FATCA agreement,” Long said.

Foreign governments can enter into one of two alternative model intergovernmental agreements with the United States, according to the Treasury Department. Under a Model 1 agreement, foreign financial institutions report the relevant information to their respective governments, which then relay that information to the IRS. A Model 2 agreement contemplates that financial institutions will provide relevant information to the IRS themselves, with government-to-government cooperation serving to facilitate reporting when necessary to overcome specific legal impediments.

As the July 1 deadline drew near, there was a flurry of FATCA agreements made with the United States. On June 30 alone, the United States locked up either signed agreements or agreements in substance with 14 jurisdictions, including Israel, according to the Treasury Department website.

But strict enforcement of FATCA won’t come until at least 2016 for foreign financial institutions that are onboard with the US law. According to IRS guidance issued on May 2, the years 2014 and 2015 will be treated as a transition period for foreign financial institutions that have demonstrated “good faith efforts” in complying with the provisions of FATCA.

“The IRS would consider not only whether a person subject to those provisions actually complied with them but also whether the person made good faith efforts to do so,” Long said. “This can be viewed as a concession of sorts that not only are the new FATCA requirements extremely complex, but they have been continuously modified so as to make compliance extremely difficult even for persons who make every effort to do so.”

CFOs Behind on FATCA Efforts
According to the results of the second quarter CFO Signals survey from Big Four accounting firm Deloitte LLP, only 8 percent of CFOs reported that they have processes in place to make the necessary withholdings as of July 1, and only 9 percent said their companies have figured out how FATCA affects their non-US employee plans. Overall, 14 percent have completed the classification effort, while 23 percent reported that the process is underway.

“FATCA is a prime example of the complex tax environment in which today’s CFOs operate, where US tax law impacts an organization’s global financial operations,” Carl Allegretti, chairman and CEO of Deloitte Tax LLP, said in a written statement. “CFOs and their tax departments should consider working together to develop an actionable plan to address FATCA and mitigate the risks of noncompliance.”

Related articles:

Reports: 77,000 Banks Are Complying with US on FATCA
Foreign Banks Given Transition Period for FATCA Compliance


Replies (4)

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By Jeff Sheldrake
Jun 25th 2015 20:11 EDT

What the US Government isn't telling people is there is growing opposition to FATCA particularly in Canada where money is now being raised for a constitutional challenge in Canadian courts.

Expect to see legal challenges in Europe as well. FATCA discriminates against dual citizens and I expect to see duals carved out of FATCA in the future.

FATCA's scope could be limited to sole US passport holders only.

Google the Isaac Brock Society for more accurate information.

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By Dipak
Jun 25th 2015 20:11 EDT

Question: Will the IRS red-flag or Audit me or the FATCA or FBAR investigate me.
My friend Mr.A is a US citizen, originally from Dubai. His rich friend in Dubai Mr.B, is giving him AED700,000 equal to USD190,000 when Mr.A next visits Dubai in 2015. Mr.B request is Mr.A keeps the givers, Mr.B’s name secret.

Mr.A would like to keep this amount in the Dubai Bank, until he figures out what to do with it. Mr.A will file the interest income in his 1040 IRS Taxes and also report the account in the FBAR filing. His concern is will the IRS, FBAR or any other regulatory agency question him as to how he suddenly got this large amount and foreign bank account in 2015. If so, then he is not interested in the bank account. And will consider other options. Like buying a small condo in or around Dubai. Or investing in Bitcoins. Or traveling and living a life of luxury till the money runs out etc.
Mr.A is uneducated and files his 1040 every year. His reportable income every year is around USD20,000.
Your views and feedback will be highly appreciated.

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By Dipak
Jun 25th 2015 20:11 EDT

Depends on current balance of mr A's account, if under $50,000 then it is an exempted low value account under FATCA and will remain so unless balance passes $1million at any future year end, and will not be checked or reported to IRS. If mr A is already a US citizen paying taxes then FATCA will make no difference to him.

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By Alex
Jun 25th 2015 20:11 EDT

That grow doesnt affects as much, just depends on it. Tho Powerbank helps.

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