FATCA was always going to prove a controversial measure imposed by Congress to track down the assets of US taxpayers in tax havens around the world.
But one unintended consequence of the Foreign Account Tax Compliance Act (FATCA) is that foreign banks are opting not to register with the Internal Revenue Service (IRS) because it would mean spending millions of pounds in compliance measures.
Many are now increasingly opting for the cheaper course of asking US customers to bank elsewhere.
Nigel Green, chief executive of international financial consultancy deVere Group, says: “There is research which suggests that for a non-US bank to become FATCA compliant is going to cost millions of pounds.
“On top of this, there will be a reduced foreign investment in the US because of FATCA – at a time when the US economy needs it.”
Banks don’t want FATCA costs
He added that it was increasingly attractive for those US citizens who had settled abroad to give up their citizenship and avoid being drawn into FATCA.
The IRS says that in 2011, 1,780 people gave up their US passports.
FATCA compels foreign financial intuitions (FFI) to reveal to the IRS which US citizens have accounts and what their balances are.
Failure to comply with the law will see the US government withhold 30% of monies owed to a FFI.
Already there are reports that some banks around the world are rejecting applications from US citizens for accounts and even, in some cases, cancelling old expat accounts rather than spend a fortune in complying with the law.
The Institute of International Bankers confirmed that some banks, including some industry leaders, were taking this action because of ‘unnecessary burdens and costs’.
6 million US expats affected
With around 6 million expat Americans living around the world, the withdrawal of banking services for US customers is likely to become a major issue.
Among the banks to have withdrawn services to US citizens are HSBC, which announced in July 2011 that its wealth-management service was no longer being offered to US residents and Deutsche Bank.
Banks have also flagged up another issue with FATCA which is how the law determines whether a client is a US citizen.
Essentially, a US citizen is defined by the act as someone who is tax resident citizen or who holds a green card – but anyone who has lived in America for at least 183 days in a three-year period is also considered to be a US taxpayer under the legislation.
Failure by a US expat taxpayer to register with the IRS and detail accurately their foreign financial assets including savings, insurances and equities, is punishable by hefty fines.