US stretches FATCA net to two more countries

The US government has agreed Foreign Account Tax Compliance Act (FATCA) deals with Switzerland and Japan, bringing the number of agreements to seven in just a few weeks.

The US Treasury has already sealed FATCA agreements with France, Germany, Italy, Spain and the United Kingdom.

The deals are aimed to cut costs and red-tape for financial institutions reporting investment holdings of US taxpayers to the Internal Revenue Service (IRS).

FATCA reporting starts on January 1, 2013, and is designed to send information from offshore financial organisations to the IRS about US taxpayers with accounts and holdings that may generate earnings or capital gains.

The law also orders foreign financial institutions to automatically deduct a 30% withholding tax regardless of any tax due.

The country-to-country agreements let financial institutions report FATCA information to their home nation tax authority who will than transmit the data to the IRS as part of the existing framework of tax treaties.

Financial institutions in countries without an agreement with the US Treasury will have to send information direct to the IRS. If they fail to do so, they could face fines and a ban from trading in the US.

“FATCA is an important part of the US government’s effort to improve tax compliance. The intergovernmental frameworks announced today provide a second model for implementing FATCA in a way that addresses domestic legal impediments and reduces burdens on financial institutions,” said Acting Assistant Secretary for Tax Policy Emily S. McMahon.

“We welcome Switzerland’s and Japan’s willingness to strengthen and improve their cooperation with the US in combating international tax evasion.”

Many financial organisations across the world, like banks, investment funds and insurance companies, have complained about FATCA due to the cost of compliance and penalties for flouting the rules.

The US Treasury estimates the worldwide cost of implementing FATCA is about $10 billion against an annual tax yield of around $1 billion. Much of the cost is offset on foreign financial institutions who have to set up systems to report FATCA information.

Read our early article about FATCA advice here

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