The Foreign Account Tax Compliance Act (FATCA) information exchange network has gone live and is receiving the first reports on the financial affairs of US taxpayers.
The online network links tax authorities in 110 countries and more than 145,000 financial institutions with the Internal Revenue Service (IRS).
Financial institutions outside the US must tell the IRS about any accounts and investments held by US taxpayers under the FATCA rules – or face a withering 30% withholding penalty on any transactions through the US dollar currency system.
The reports are at two levels –
- US resident taxpayer with account balances of $50,000 or more each year
- US expats with account balances of $200,000 or more each year
The controversial law has triggered worldwide protests from financial firms and US taxpayers over data and banking privacy and has led to many foreign financial institutions closing accounts for US customers or turning away applications from new American clients.
Tax secrets exposed
“Switching on the International Data Exchange Service is a landmark for FATCA,” said IRS commissioner John Koskinen.
“The move heralds the beginning of a secure system of automated, standardised information exchanges between government tax authorities. This will improve the performance of the IRS, which can now identify hidden undeclared accounts overseas and make the US tax system fairer for everyone.”
For countries with FATCA intergovernmental agreements with the US, the new exchange is not a one way street.
The IRS is also collecting financial data on expat taxpayers from these countries and transmitting the information back to their home tax authorities.
FATCA then allows the IRS and compliant tax authorities to compare financial information on tax returns with details filed by overseas financial institutions to determine if taxpayers are trying to hide wealth offshore.
Meanwhile, China has decided to implement a FATCA-style law requiring taxpayers and businesses to declare their offshore incomes.
Although the law has lain dormant on the statute book for some years, the government has not enforced the rules.
One state government in Guangzhou has ordered executives from 150 of the region’s largest companies to a summit meeting where tax officials will spell out what they expect them to declare.
They will also outline tax declarations they want from expat workers.
The Organisation of Economic Cooperation and Development (OECD) and European Union are also working on FATCA-style laws that will allow dozens more countries to swap tax data on foreign account holders and investors.