With growing numbers of countries around the world signing up to the Foreign Account Tax Compliance Act (FATCA), wealthy Americans may inadvertently fall foul of the law.
However, by structuring their finances to cope with their FATCA obligations, they can avoid some tax problems.
Investors should essentially take a three-pronged approach to avoid falling into the FATCA cut for tax trap.
Firstly, the issue of taxation is a serious consideration and American investors need to be aware of tax agreements between countries and understand how different accounting regulations work so they can adapt their investments to cope with the demands of various tax regimes.
By viewing tax and investment considerations together, US investors should manage to avoid unintended consequences arising from how they run their finances and investments.
Secondly, on the subject of investment Americans need to be aware of reporting requirements which may cover all family members, so an investment strategy will need to be structured so that no one breaks the rules.
It is particularly important that US taxpayers do not breach the rules around Controlled Foreign Corporations and Passive Foreign Investment Companies as these details permissible investments without damaging the person’s tax status.
Finally, America has some of the most onerous requirements for reporting financial affairs in the world.
All reports must be made in dollars which means that the taxpayer or their advisers must factor in a foreign exchange component. One of the big problems is for those families who are spread over several countries and therefore come under different jurisdictions and their separate reporting requirements.
The purpose of FATCA is for offshore financial centres to reveal their secrets and they are being forced to sign up or face a penalty charge of 30% on all transactions conducted between a financial institute and the US.
FATCA is aimed at unearthing the account details of all US taxpayers who have assets of more than $50,000 in offshore accounts – and this includes family trusts.
However, one of the consequences is that US resident non-doms and Green Card holders are also brought into the remit of the new law.
Anyone who is likely to come to the attention of US tax authorities because of FATCA needs to create an investment strategy for the entire family and not just for the taxpayer.
There must also ensure that family members in one country are not disadvantaged by the reporting requirements of family members in another one.