The Internal Revenue Service (IRS) will have more leverage over those seeking to minimize their tax bills by moving assets outside the U.S. when the Foreign Account Tax Compliance Act (FATCA) takes effect on July 1, 2014. Enacted in 2010, FATCA is aimed at combating international tax-dodging schemes by U.S. taxpayers and businesses that cost the U.S. Department of the Treasury an estimated $100 billion each year. Approximately 77,000 banks and financial institutions have already registered under FATCA, and 70 countries have agreed to assist the U.S. in enforcing the statute.
FATCA is designed to increase compliance by U.S. taxpayers who are already required to file a Report of Foreign Bank and Financial Accounts (FBAR) by June 30 each year for foreign bank accounts holding more than $10,000. FATCA increases FBAR compliance by encouraging foreign financial institutions (FFIs) to report U.S. account holders rather than face a 30% withholding tax on their U.S. investment income and potential exclusion from U.S. capital markets.
FATCA law requires that U.S. taxpayers withhold 30% from certain types of payments to FFIs — banks, broker/dealers, insurance companies and hedge funds —unless provided with documentation showing the FFI is exempt from withholding. FFIs may be granted exemption if they agree to provide the IRS with information — account numbers, balances names, addresses and U.S. identification numbers — regarding U.S.-owned accounts holding over $50,000.
Exempt FFIs will be issued a global intermediary identification number (GIIN) that must be provided to a U.S. payor prior to remitting payment to a FFI as proof of their exemption under FATCA. FFIs should also note that when they agree to comply with FATCA through reporting U.S. accounts, they also agree to become a withholding agent with respect to any U.S.-source payments it makes to other FFIs or to certain account holders who are not compliant and therefore are unable to provide the required information or GIIN.
The U.S. government expects FATCA to generate an estimated $8.7 billion over the next ten years, not from the withholding tax from FFIs, but through increased FBAR compliance resulting in less tax evasion and more taxes paid on foreign assets.
Compliance is much less onerous for FFIs than the 30% withholding tax threatened by the IRS, but does require financial institutions and other entities making or receiving payments of income arising from a U.S. source toupdate their policies and procedures with FATCA requirements.