The US anti-tax evasion law FATCA is provoking a lot of debate and controversy around the world as US expats, financial institutions and governments try to work out how the provisions will affect them and how they do business with the US.
Final FATCA guidance was issued by the Federal Reserve and Internal Revenue Service (IRS) in February 2013, although some clarifications may come out of Washington.
Here are some of the most commonly asked questions about FATCA and their answers:
What is FATCA?
FATCA is the short name for the US Foreign Account Tax Compliance Act.
The law was voted in by Congress in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act.
FATCA requires foreign financial institutions to report details of accounts held or controlled by US taxpayers to the Internal Revenue Service (IRS)
What is the aim of FATCA?
To identify US taxpayers who are hiding their wealth offshore in a bid to evade paying taxes
What is a foreign financial institution?
A foreign financial institution or FFI is any commercial organisation holding or managing money or other assets – like a bank, investment fund or insurance company.
Why is FATCA so controversial?
FATCA demands FFIs to supply personal and financial information about US taxpayers to the IRS without the taxpayer’s permission.
The IRS wants FFIs to:
- Identify all US account holders or accounts controlled by US taxpayers via a third party, like a corporation or trust
- Send financial information about the accounts to the IRS
What happens if the FFI ignores FATCA?
The US government will levy a 30% withholding tax on some financial transactions in the US made by the account holder or the FFI
Doesn’t FATCA breach data protection laws in some countries?
Yes. So, to get around the problem the US government is entering into intergovernmental agreements.
This lets the FFI report the information to their local tax authority, and the tax authority then passes the data to the IRS. In return, the IRS will collect financial information on that country’s taxpayers with accounts and assets held by financial institutions in the USA and pass the data back to the tax authority.
Which countries are signing up to FATCA?
Norway, the United Kingdom, Mexico, Denmark, Ireland, Switzerland, and Spain have signed FATCA intergovernmental agreements with the US, and the US Treasury is in talks with more than 50 other countries to sign similar agreements.
What happens if a country does not sign up to FATCA?
Individual FFIs still have to come to an agreement with the IRS or they risk withholding tax penalties.
Some banks are closing accounts of US customers, because if they have no US customers, they do not have to sign up to FATCA and do not risk withholding penalties.
When does FATCA start?
The official date is January 1, 2014
Does FATCA only affect US citizens?
No. FATCA applies to any US resident who should declare income, gains or other earnings on an IRS tax return.
Do taxpayers have to make a FATCA declaration?
Yes. Everyone liable to pay tax in the US should declare their worldwide income on their IRS tax return and complete the FATCA forms that are applicable to them. The IRS will crosscheck the information against reports made by FFIs.
My foreign accounts are held by a third party for me – what do I do?
You still need to declare your financial interest in the accounts or you may risk an IRS investigation and penalties.
Where is the official information about FATCA?
The US Treasury has an online FATCA Resource Centre where all the latest FATCA announcements are listed, along with information about completing tax returns and forms for individuals, FFIs and other organisations.
Even transcripts of official intergovernmental agreements are on the web site. – www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx
