Most Americans you meet are fiercely proud of their nationality. Yet some of the 6 million or so Americans living overseas are finding that financial institutions do not want to deal with them – simply because they are US citizens.
The reason for this is FATCA – the Foreign Account Tax Compliance Act. A piece of anti-avoidance legislation designed to save $7.6 billion in otherwise lost tax in the next 10 years, FATCA turns foreign financial institutions (FFIs) into the eyes and ears of the IRS. Read more about FATCA advice in this earlier article
What does FATCA mean in practice for American citizens?
For account opening procedures or the initial purchase of a financial investment, US citizens may not notice any changes to current practices. Mature overseas investment destinations are well versed in money laundering requirements and identity verification. Know Your Customer type enquiries are now commonplace.
But the on going duties of an FFI will impose a heavier regulatory burden. Firstly, there is the reporting duty. FFIs must give the IRS details of the accounts US citizens hold, and what the balances are. The requirement extends beyond individuals to private companies and trusts with US ownership.
But the IRS is not content with just recruiting FFIs as informants. In some circumstances, foreign banks also become the IRS’ tax collectors; in some cases withholding 30% tax.
For those FFIs that do not comply with the FATCA legislation provides that the IRS can impose a 30% withholding tax on US securities from 2014.
Aside from any distaste FFIs may feel for doing this (it seems to go against the culture of confidentiality that persists in the overseas investment world), the likely cost of compliance has sent a shockwave through the industry. New systems will need to be installed, staff trained and compliance monitored.
Anti-FATCA campaigners fear that some FFIs may take the policy decision that it is simply too expensive, and too risky, to offer their services to American expats.
Given that the law will apply to business as well as individuals, Americans of all ages (working or retired) will be affected. So will this mean that some will simply decide that they do not want to be Americans anymore? This trend may already have started. The Wall Street Journal has reported that 1,800 people surrendered their citizenship last year – a significant increase on the year before.