The US tax authorities have turned up the heat on banks and financial firms by stepping up the pressure on them to comply with the Foreign Account Tax Compliance Act (FATCA).
In a statement, the US Treasury and Internal Revenue Service (IRS) ordered foreign financial institutions to meet FATCA’s information reporting and withholding tax – or face the consequences.
The US Treasury warning urges foreign financial institutions in countries without a FATCA agreement to register under the act and to deal directly with the IRS by July 1, 2014.
FATCA is a controversial US law that requires any financial firm outside the US to send a report identifying any US taxpayers they may have as clients. The report must also detail any earnings or capital gains from their holdings that amount to more than $50,000 in a tax year.
FATCA penalties
The US government is running a two-way reporting system –
- Some governments are signing FATCA agreements with the US that lets their tax authority collect the data and transmit the information on to the IRS – in return for similar information from US financial firms on their own taxpayers
- Individual firms must sign up and make the annual report direct to the IRS if their government has no FATCA treaty
The US Treasury says nine FATCA treaties are signed off, 16 are agreed and ready to sign and ‘many more’ are under negotiation.
Financial institutions that fail to adhere to the strict FATCA rules face severe penalties.
US banks and financial firms will have to withhold 30% of any transactions relating to the institution that pass through the American financial system.
Global compliance
The US Treasury can bar a repeat offender institution from the US money markets and banking network, effectively shutting down bank, fund or investment company as most international financial transactions run through the US in dollars at some stage.
“We want to keep costs down for foreign financial institutions, so we have drafted the agreement and guidance with that in mind,” said Deputy Assistant Secretary for International Tax Affairs Robert B. Stack. “However, we aim to have full global compliance with FATCA, which is becoming the international standard for curbing tax evasion.”
The latest nation to agree FATCA with the US is Barbados. Britain, France, Spain, Italy and Japan are among the nations that have already signed a treaty with the US.
