FATCA 2 – the tax laws governing how foreign financial institutions should report financial information about US taxpayers with holdings overseas – has been issued by the US Treasury.
The rules mark the second step in the implementation of the Foreign Account Tax Compliance Act (FATCA) and mark another leap forward in tightening the tax net on expats and investors with holdings outside the USA.
But foreign financial institutions (FFIs) around the world have raised issues about the law and especially the changes they will have to make to their systems to comply and with the penalties which could follow if they don’t meet the regulations.
It’s those concerns from financial institutions which led the US Treasury to sign an intergovernmental agreement with Britain and launch talks about FATCA treaties with more than 50 other nations.
Tax information exchange
Essentially, the tax information sharing model they have agreed to is for the FFIs to report the required information to their own governments, rather than the Internal Revenue Service (IRS).
That information will then be used by the government on a reciprocal basis with the States – but based on the tax treaties that are already in place – which means the IRS will then exchange information.
And even then, the IRS will only share its information with those countries which have robust and confidential systems in place so the information remains secret.
The IRS says the information can only be used for tax purposes.
It’s these concerns about confidentiality – and the issues about various countries own privacy laws – which led to a second model agreement which aims to only hand over reciprocal information ‘on request’.
This agreement also helps protect financial institutions as they will then be complying with their country’s own legislation.
Government agreements
The next stage to enact FATCA is that the governments who have made agreements will issue a directive to its FFIs for them to register with the US Internal Revenue Service by January 1, 2014.
FATCA was approved by Congress in 2010 to force FFIs to hand over information on financial accounts held by US taxpayers – and failing to do so means falling foul of a withholding 30% tax on any US sourced income that is causing concern.
The new law also extends to foreign companies in which US taxpayers hold a ‘substantial’ interest.
The FFIs will then have to contact their account holders who are US taxpayers and request their US tax code number and ask for permission to report their finances to the IRS. These reports will be made annually.
In addition, the FFIs will have to comply with the tax agreement which covers due diligence and reporting.
The agreement also covers any new accounts which are opened by a US taxpayer which will see the FFI asking for permission to report their details as a condition of opening an account.
It seems to be a pretty scary situation for Americans living overseas. Regarding foreign companies, I wonder what is considered “substantial” interest. Seems like such vague wording could be abused easily.
sadly “substantial” is defined and can be as little as 1% if in financial services- otherwise it’s 10% I believe.
The IGA reciprocity, is reciprocity in name only. Also, it is being made between treasury technocrats, and some legislators might have something to say about what their bureaucrats have a greed to.
Also, it is important to note, that the so called reciprocity still requires Congress to allow the IRS to unilaterally impose the non resident reporting structure on US banks that the IRS needs to make this deal, and that is still NOT certain.
Additionally, it is not reciprocity any any sense of the word. FATCA requires details and breath of information on US Citizens living around the world, and the IRS is NOT requiring US banks to collect similar data on all Citizens of the world living in America, just interest paid to non residents.
It is a very hallow promise, and you wonder when these countries that are capitulating will wake up and realize it they have been had again! Maybe Germany who said, they will only approve the IGA, if they have real reciprocity. They know it is not that. Also, they are pretty upset with the US for renigging on Basil III accords and not requiring the reserve % they agreed for US banks, so this could still all come apart.