With growing numbers of countries around the world signing up to the Foreign Account Tax Compliance Act (FATCA), wealthy Americans may inadvertently fall foul of the law.
However, by structuring their finances to cope with their FATCA obligations, they can avoid some tax problems.
Investors should essentially take a three-pronged approach to avoid falling into the FATCA cut for tax trap.
Firstly, the issue of taxation is a serious consideration and American investors need to be aware of tax agreements between countries and understand how different accounting regulations work so they can adapt their investments to cope with the demands of various tax regimes.
By viewing tax and investment considerations together, US investors should manage to avoid unintended consequences arising from how they run their finances and investments.
Tax status
Secondly, on the subject of investment Americans need to be aware of reporting requirements which may cover all family members, so an investment strategy will need to be structured so that no one breaks the rules.
It is particularly important that US taxpayers do not breach the rules around Controlled Foreign Corporations and Passive Foreign Investment Companies as these details permissible investments without damaging the person’s tax status.
Finally, America has some of the most onerous requirements for reporting financial affairs in the world.
All reports must be made in dollars which means that the taxpayer or their advisers must factor in a foreign exchange component. One of the big problems is for those families who are spread over several countries and therefore come under different jurisdictions and their separate reporting requirements.
Investment strategy
The purpose of FATCA is for offshore financial centres to reveal their secrets and they are being forced to sign up or face a penalty charge of 30% on all transactions conducted between a financial institute and the US.
FATCA is aimed at unearthing the account details of all US taxpayers who have assets of more than $50,000 in offshore accounts – and this includes family trusts.
However, one of the consequences is that US resident non-doms and Green Card holders are also brought into the remit of the new law.
Anyone who is likely to come to the attention of US tax authorities because of FATCA needs to create an investment strategy for the entire family and not just for the taxpayer.
There must also ensure that family members in one country are not disadvantaged by the reporting requirements of family members in another one.
Excellent article. I’d add that FATCA like provisions are being approved in other countries now, and this information will probably be used for anti-bribery and anti-money laundering actions by international and US government agencies. For USA citizens, residents and transients, for example, knowledge of the Foreign Corrupt Practices Act and the Bank Secrecy Act is important, specially if family members in other parts of the world share or manage affected bank accounts.
Also, as an anti-money laundering consultant, I would suggest you and your readers avoid the word “structure” and “structuring” since the term is used to define “the practice of executing financial transactions (such as the making of
bank deposits) in a specific pattern calculated to avoid the creation of
certain records and reports required by law.,.” (Wikipedia). .
Of course, good financial planning is, as mentioned above, the best solution for any individual and family with world wide investments and accounts.
When you write “world wide accounts”, do you mean local accounts ouside of US jurisdiction or the non-local account within US jurisdiction? I would assume the concept of “good financial planning” applies equally to local accounts within US jurisdiction or local accounts outside of US jurisdiction, meaning that your statement excludes Americans living abroad who logically cannot be bothered with FATCA.