The latest country to sign a FATCA tax agreement is Switzerland – formerly a bastion of banking and investment secrecy.
The Swiss join the UK, Mexico, Ireland, Spain, Norway, Denmark and Italy as the first countries ready to implement FATCA – the US Foreign Account Tax Compliance Act – from January 2014.
Another country announcing FATCA negotiations with the US is South Africa, where the National Treasury says the main reason for signing up is to avoid the potential penalties and have in place an agreement which would reduce compliance costs for South Africa’s financial institutions.
While many will see the imposition of rules to unearth the offshore accounts of those apparently trying to mitigate their tax bills as being a good thing, there have been unforeseen consequences for Americans living around the world.
As the South Africans have flagged up, the costs to an institution having to comply with FATCA are huge and many are finding it easier, and cheaper, to simply close and refuse all accounts to US taxpaying customers to avoid having to deal with FATCA and its implications.
FATCA was launched as a bid to clamp down on US taxpayers hiding money in offshore accounts but now it looks like the law has brought an end to banking secrecy cherished by financial jurisdictions around the world.
Passed by Congress in 2010, FATCA is now being implemented globally.
The act forces foreign financial institutions (FFIs) to handover account details of American customers to the US Internal Revenue Service (IRS). Failing to comply would see the institution concerned being hit with a 30% withholding charge on transactions in the US.
However, in complying with the act, many FFIs complain of having to break laws data protection and privacy legislation laws at home.
This led to governments initiating discussions to update their tax agreements with America so that the information exchanged would be done at a government level – avoiding the legal complications.
Tax information swaps
This also allows the US to hand over information about the financial accounts of foreign nationals to their relevant tax authorities.
More than 50 countries are negotiating intergovernmental agreements (IGAs) to beat FATCA’s January 2014 deadline.
The UK was one of the first countries to sign up and consequently use the American legislation as the basis for a its own version, dubbed ‘son of FATCA’ and which is aimed at removing secrecy for accounts being held in its territories and jurisdictions including the Isle of Man and the Channel Islands.
However, the UK’s Treasury has extended the deadline for views from institutions on guidance for how FATCA can be implemented effectively.
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