Individuals and Businesses Prepare For FATCA Deadline In international tax, the ongoing news has been the sweeping impact of the Foreign Account Tax Compliance Act (FATCA). FATCA is a law that was passed to curb illegal tax evasion by United States citizens (and green card holders), and businesses. However, critics propose that the revenue brought in by FATCA is trivial compared to the damage the legislation will cause to foreign investment to the U.S. and law-abiding Americans living and doing business overseas. FATCA requires foreign financial institutions to report all account activity of U.S. persons and businesses in an effort to target those who are non-compliant with U.S. tax law. Although FATCA was signed into law in 2010, it will go into effect this year. Following two 6-month delays, many institutions, businesses and individuals have hoped for a rumored third postponement.
However, according to a statement made on January 28th, 2014, by the Internal Revenue Service’s Deputy Commissioner, Michael Danilack, to the New York Bar Association’s Tax Section, FATCA will go into effect on July 1, 2014 as planned. There will be no more delays. The news buzz generated by FATCA’s fast approaching certainty is eclipsed only by the negative backlash the legislation is receiving. According to critics of FATCA, the legislation has already begun to have some very negative repercussions for U.S. businesses and individuals operating and residing on foreign land. Many countries have voluntary signed up to report their U.S. account holders, most likely in an effort to avoid the 30% withholding tax penalty on U.S. accounts, enforced by the US Treasury.
As of January 2014, more than 20 countries and jurisdictions have signed a FATCA agreement with the United States, including Germany, France, Switzerland and the Cayman Islands, previously thought of as a tax haven. However, Russia and China have been adamant in their refusal to divulge U.S. account holders’ information unless U.S. financial institutions report the banking activities of Russian and Chinese account holders. This addresses the hesitancy felt by many about how FATCA may put the privacy of individuals and businesses at risk. The burden of cost associated with determining, and reporting all U.S. account holders to the IRS falls directly on the foreign financial institutions that have entered the FATCA agreement with the United States. Experts predict that foreign banks will refuse service to Americans in an effort to avoid the costs of complying with FATCA.
It has been reported that major European banks, including HSBC, are already dropping U.S. clients. We have certainly experienced this with many of our clients. As banks bar their doors to U.S. account holders, individuals are left without any financial security, and businesses are taking their capital elsewhere. The overall financial health of the nation can be greatly impacted if FATCA critics are right. The loss of foreign investment to the U.S. may be a potential disaster to our economy due to our dependence on foreign investment as capital.
As the July 1, FATCA deadline approaches, we continue to counsel our clients through the complex changes involved in staying compliant with FATCA while making sure that our clients’ foreign interests are protected.