The start of tax information reporting between the US and foreign governments and financial institutions under Foreign Account Tax Compliance Act (FATCA) from July 1, 2014 triggered a rush of nations joining the network at the eleventh hour.
The major surprise for FATCA watchers was China agreeing ‘in substance’ to abide by the rules at the last minute.
China initially resisted joining FATCA, but the risk of fines and blacklisting Chinese financial firms from working within the world’s default US dollar economy was too much for Beijing to wager against.
The Chinese government is also reportedly interested in targeting corrupt officials hiding money offshore as part of their FATCA agreement with the US.
Latest countries to join FATCA
China was not alone in signing up late. Other countries joining the network were:
- Algeria
- Bahrain
- Cape Verde Islands
- Dominican Republic
- Haiti
- Iraq
- Malaysia
- Moldova
- Montenegro
- Nicaragua
- San Marino
- Serbia
Each country is considered FATCA compliant by the US from July 1, even though the tax treaty may not yet have been signed.
The FATCA list of reporting countries now stands at 125 nations and covers most of the European Union and the leading financial centres across the rest of the world.
The Internal Revenue Service (IRS) also issued the second list of financial institutions reporting under FATCA rules. The first list includes around 77,000 – the new list has increased by about 10,000 banks, finance houses and other financial providers to 87,993 institutions.
FATCA penalties
The IRS intends to publish a new version of the list on the first day of each month.
The full list is available for search or download for free.
FATCA is aimed at identifying US taxpayers with bank accounts or investments outside the United States.
Financial providers must identify their US customers and report any accounts with a balance of more than $50,000 to the IRS. The IRS will then cross-check the details with tax returns.
In return for government tax authorities providing the data, the US has agreed to identify and send reciprocal tax information about reporting country taxpayers with bank accounts and assets in the US.
Financial institutions that refuse to hand over information about their US customers risks withholding fines of 30% on all their transactions passing through the US dollar system. The IRS and US Treasury have also warned that persistent offenders could be excluded from the US dollar system.
Has the US congress voted on allowing reciprocity from US investment vehicles? Have the banks agreed to do this? Does the US fall under its own FATCA requirements for other countries? If not, what will happen when these other countries figure this out? Will they pull out of these agreements and the US start withholding 30% on the reneging countries? What will those countries do then? What about poor emerging countries whose banks can not afford the compliance costs which I have heard are in the millions. Will these countries be subject to bankrupting withholdings? I do not understand how this will actually unfold. Every US bank/investment firm will have to identify clients from all of these other countries and report them, sounds like and expensive time consuming nightmare to me. If these people are identified will they just close their accounts and move their funds out of the US? Will they do that before they are identified? I would imagine there are more foreign investments in the US than there are US citizens investing in foreign countries. Could someone please help me understand what I am missing here.
“The IRS and US Treasury have also warned that persistent offenders could be excluded from the US dollar system.” Might the US actually be encouraging this under these new laws? It is my uneducated understanding that at least six countries are currently starting to do this. What happens if the US dollar is no longer the reserve currency? I just find this all too confusing. If the original idea was to stop tax evasion it seems like the compliance costs will far exceed what might have be reaped from those tax evaders that are waiting around to be FATCA’ed. Just seems like one big fat global nightmare to me. Wouldn’t it have been much less confusing to just “follow the money” for those expected of tax evasion? Or if the US is looking for more cash just change the laws on dividends and carried interest, not upsetting the global applecart?
I doubt that US also identify and send reciprocal tax information about reporting country taxpayers with bank accounts and assets in the US. Actually, tax evaders from fast growing economies like India, China are parking money in countries like Switzerland & may be in countries like US also. But it is hardly to find US citizens parking money in other emerging nations. I do not know who will bear the cost of processing to Identify US tax evader & informing the same to USA.