The Foreign Account Tax Compliance Act is creating problems for not only wealthy taxpayers trying to stash their money in secret Swiss bank accounts, but also for Americans living abroad.
The law was enacted as part of the HIRE Act last year to help offset the extra spending on job creation and tax credits for new hires with extra revenues from tax enforcement. Now those efforts to balance new spending with revenues are coming back to haunt some expatriate taxpayers, just as Washington gets ready for a debate this week over how to stimulate job creation with President Obama’s eagerly anticipated jobs plan.
According to a group of expats known as American Citizens Abroad, FATCA is already making it difficult for them to do business with foreign banks, and the new law is generating friction with officials in other countries. Under the law, U.S. taxpayers who hold financial assets outside the U.S. need to report those assets to the IRS, as they have under the old FBAR reporting rules. But in addition, FATCA also requires foreign financial institutions to report directly to the IRS information about the financial accounts held by U.S taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest, according to the IRS.
Participating foreign financial institutions have to enter into agreements with the IRS to identify U.S. accounts, report certain information to the IRS regarding U.S. accounts, and withhold a 30-percent tax on certain payments to non-participating foreign banks and account holders that are unwilling to provide the required information. Under the new rules, foreign financial institutions that do not enter into an agreement with the IRS would be subject to withholding on certain types of payments, including U.S. source interest and dividends, gross proceeds from the disposition of U.S. securities, and pass-through payments.
Those requirements are resented by a number of foreign banks, which chafe at the idea of the U.S. government imposing requirements on them, even if they don’t do business in the U.S. Some foreign banks have responded to the new law by shutting down the accounts of Americans. Expats also point out that the requirements make it difficult for them to enter into business partnerships in other countries.
American Citizens Abroad wrote a letter last week to Treasury Secretary Timothy Geithner, IRS Commissioner Doug Shulman and other officials calling for the repeal of FATCA, according to Forbes.com. They claimed the new law would create a “two-tier banking system” and would still lead to a “gaping loophole” for those who wish to evade U.S. taxes. They also expressed doubt that the Chinese would comply with the new law. They say FATCA could lead to disinvestment in the U.S. by foreigners and that private bankers are already advising clients to clear their portfolios of U.S. securities. The FATCA requirement that 10 percent ownership of a foreign non-listed company or partnership be reported to the IRS is shutting U.S. taxpayers out of partnerships and joint ventures overseas, according to the group.
Last month, the group released a report that noted concerns from banking groups such as the Japanese Bankers Association, the European Banking Federation and the Institute of International Bankers. The Japanese association was quoted as saying, “In the event that the implementation of FATCA is not practically feasible for the Japanese financial services industry, it would result in substantial confusion in the industry and could ultimately lead Japanese financial institutions to withdraw their investment from U.S. financial assets.”
The law is scheduled to take effect in 2013, but the IRS has been hearing concerns and has opted to phase it in over time, with some requirements not kicking in until 2014. In July, the Treasury and the IRS issued a phased timeline for foreign financial institutions and U.S. withholding agents to implement the various requirements (see IRS Issues Guidance to Foreign Banks on FATCA Compliance).
Still, even with the delay, it is likely that the new law will generate further pushback as the deadline approaches. Other efforts to force foreign banks into disclosing information on their U.S. clients are already running into resistance, especially in Switzerland, which is balking at an ultimatum to disclose information on customers at Credit Suisse and other banks. Despite the IRS’s success with UBS in 2009, the Swiss Bankers Association is urging the country’s government to resist ratifying a new tax treaty with the U.S. government, which the U.S. Senate has also not yet ratified. The treaty was negotiated in 2009, but with international tax enforcement so much of a moving target nowadays, getting countries to agree on how to enforce tax disclosures on a country-by-country basis may become ever more difficult.
The efforts by the Organization for Economic Cooperation and Development to pressure countries into international norms of tax reporting compliance may turn out to be the most fruitful way in the end for nations like the U.S. to encourage their citizens to disclose their foreign holdings. But FATCA may generate more friction with U.S. allies and make it more difficult for banks in other countries to do business with U.S. clients.
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