“The Foreign Account Tax Compliance Act (FATCA) is an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts.”
www.irs.gov, Foreign Account Tax Compliance Act (FATCA)

With the availability, in July 2013, of a secure online portal to enable Foreign Financial Institutions (FFIs) registration under the FATCA fast approaching, now is a good time to look at some key provisions of this legislation.
 
On March 18, 2010, President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act. Included in this Act were key provisions of the FATCA. The intent of this Act is to combat tax evasion by U.S. persons holding offshore accounts with foreign institutions.
IRS Commissioner Douglas Shulman summarized the objectives of what can be termed as the IRS linchpin in foreign tax arena when he said, before the 22nd Annual George Washington University International Tax Conference, “The overall goal is to make it easy for individuals to comply with US tax law, and make the intermediaries who facilitate the flow of funds across borders our partners in ensuring people pay the right amount of tax. The other part of the proposal is to create disincentives for those US taxpayers who choose to do business with a financial institution that has chosen not to be a QI (Qualifying Intermediary).”

FATCA requires additional reporting by U.S. taxpayers and by Foreign Financial Institutions (FFIs). Through this legislation, the Internal Revenue Service (IRS) hopes to correct deficiencies, in previous laws relating to U.S. taxpayers with foreign assets, accounts and entities, which came into public scrutiny through IRS enforcement efforts on international banks with U.S. taxpayer accounts.

Beginning with the 2011 tax year, certain U.S. taxpayers holding foreign financial assets with aggregate values exceeding $50,000 are required to include information relating to those assets along with their income tax returns. Noncompliance and nondisclosure can result in significant penalties.

The compliance requirements that this Act places on FFIs is considerable.  Participating FFIs, institutions that enter into agreements with IRS, will have to identify and maintain documentation, withholding and reporting requirements for U.S. taxpayer accounts.  They will be subject to information return filings, similar to those required by U.S. financial institutions.  All other FFIs, which are nonparticipating, will be subject to a 30 percent withholding tax on all US-source payments unless the FFI certifies that it has no U.S. customers.

This far-reaching legislation will have considerable impact on U.S. foreign tax landscape. With increased and improved transparency, foreign tax abuse and tax avoidance will be reduced. It will also enable the IRS to achieve its goals of facilitating compliance with U.S. tax laws and increase tax revenue collections. However, even though significant landmark agreements have been reached with countries all over the world, many challenges remain.

Disclaimer: Every individual’s tax situation is different and tax situations change over time. This article is intended to give general information to enable the reader to discuss their situation with a tax adviser.  It is not intended to be tax or legal advice and should not be construed as such.

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