Foreign Account Tax Compliance Act

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Foreign Account Tax Compliance Act
Great Seal of the United States.
Colloquial acronym(s)FATCA
Enacted by the 111th United States Congress
EffectiveMarch 18, 2010 (26 USC §6038D); December 31, 2012 (26 USC §§1471-1474)
Citations
Public Law111-147
Stat.124 Stat. 97-117
Codification
Title(s) amended26
U.S.C. sections created26 USC §§ 1471-1474, 26 USC § 6038D
U.S.C. section(s) amended26 USC §§ 163, 643, 679, 871, 1291, 1298, 4701, 6011, 6501, 6662, 6677
Legislative history
  • Introduced in the House and Senate as Foreign Account Tax Compliance Act of 2009 (S. 1934, H.R. 3933) by Max Baucus (DMontana); Charles Rangel (DNY-13) on October 27, 2009
  • Committee consideration by: Senate Finance, House Ways and Means
  • Passed the Senate on February 24, 2010 (70-28)
  • Passed the House as the Hiring Incentives to Restore Employment Act, Title V, Subtitle A on March 4, 2010 (217-201) with amendment
  • Senate agreed to House amendment on March 17, 2010 (68-29)
  • Signed into law by President Barack Obama on March 18, 2010
 
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Foreign Account Tax Compliance Act
Great Seal of the United States.
Colloquial acronym(s)FATCA
Enacted by the 111th United States Congress
EffectiveMarch 18, 2010 (26 USC §6038D); December 31, 2012 (26 USC §§1471-1474)
Citations
Public Law111-147
Stat.124 Stat. 97-117
Codification
Title(s) amended26
U.S.C. sections created26 USC §§ 1471-1474, 26 USC § 6038D
U.S.C. section(s) amended26 USC §§ 163, 643, 679, 871, 1291, 1298, 4701, 6011, 6501, 6662, 6677
Legislative history
  • Introduced in the House and Senate as Foreign Account Tax Compliance Act of 2009 (S. 1934, H.R. 3933) by Max Baucus (DMontana); Charles Rangel (DNY-13) on October 27, 2009
  • Committee consideration by: Senate Finance, House Ways and Means
  • Passed the Senate on February 24, 2010 (70-28)
  • Passed the House as the Hiring Incentives to Restore Employment Act, Title V, Subtitle A on March 4, 2010 (217-201) with amendment
  • Senate agreed to House amendment on March 17, 2010 (68-29)
  • Signed into law by President Barack Obama on March 18, 2010

The Foreign Account Tax Compliance Act (FATCA) is a United States act that requires United States persons, including individuals who live outside the United States, to report their financial accounts held outside of the United States, and requires foreign financial institutions to report to the Internal Revenue Service (IRS) about their American clients. FATCA was meant to combat offshore tax evasion and to recoup federal tax revenues. The FATCA is a portion of the 2010 Hiring Incentives to Restore Employment (HIRE) Act.[1][2]

Background[edit]

Unlike many other developed countries, the United States levies income taxes on its citizens, regardless of residency, and therefore requires Americans living abroad to pay U.S. taxes on foreign income.[3][4]

Under U.S. tax law, U.S. persons are generally required to report and pay taxes on income from all sources.[5] The term U.S. persons, in this case, includes U.S. citizens and U.S. permanent residents residing within the United States.[6] Taxpayer identification numbers and source withholding are used to enforce foreign tax compliance. For example, mandatory withholding is often required when a U.S. payor cannot confirm the U.S. status of a foreign payee.[7] The IRS previously instituted a Qualified Intermediary (QI) program under Internal Revenue Code §1441 which required participating foreign financial institutions to maintain records of the U.S. or foreign status of their account holders and to report income and withhold taxes.[8] One report found that participation in the QI program was too low to have a substantive impact as an enforcement measure and was prone to abuse.[9] An illustration of the weakness in the QI program was that UBS, a Swiss bank, had registered as a QI with the IRS in 2001 and was later forced to settle with the U.S. Government for $780 million in 2009 over claims that it fraudulently concealed information on its American account holders.[9] Self-reporting of foreign financial assets was also found to be relatively ineffective.[10]

It has been estimated that the U.S. Treasury loses as much as $100 billion annually to offshore tax non-compliance.[11] Therefore, supplementing the reporting regimes already in place was deemed to be an effective means of increasing compliance and raising government revenue.[12] After committee deliberation, Sen. Max Baucus and Rep. Charles Rangel introduced the Foreign Account Tax Compliance Act of 2009 to Congress on October 27, 2009. It was later added to an appropriations bill as an amendment, sponsored by Sen. Harry Reid, which also renamed the bill the HIRE Act.[13] The bill was signed into law on March 18, 2010.

Provisions[edit]

FATCA has three main provisions:

These reporting requirements are in addition to the requirement for reporting of foreign financial accounts to the U.S. Treasury;[27] this most notably includes Form TD F 90-22.1 "Report of Foreign Bank and Financial Accounts" (FBAR) for foreign financial accounts exceeding US$10,000 required under Bank Secrecy Act[28] regulations issued by the Financial Crimes Enforcement Network (FinCEN).[29]

Controversy[edit]

Certain aspects of FATCA have been a source of controversy in the financial and general press.[30] The controversy primarily relates to five central issues:

Opposition[edit]

American Citizens Abroad, a Geneva-based organization representing the interests of six million Americans residing outside the United States, opposes the legislation and has launched a campaign to repeal FATCA. The group argues that "FATCA legislation is predicated on the faulty assumption that foreigners throughout the world with no predisposition to favor the U.S. will react positively to its attempts to convert them into unpaid IRS agents", and in addition to the issues above stresses the increased risk of identity theft, and the risk of a two-tier banking system developing to the partial exclusion of the U.S.[34]

On January 24, 2014, the Republican National Committee passed a resolution calling for the repeal of FATCA.[48]

Costs[edit]

There are wildly varying estimates of the likely cost of implementing the legislation. FATCA is expected to produce approximately $8.7 billion in additional tax revenue over 10 years, which is small relative to the estimated $40 billion per year cost of international tax evasion.[49]:36 The United States Congress Joint Committee on Taxation estimated that the FATCA bill would raise $792 million of additional taxes a year in the next ten years.[50]

Estimate of the costs to the private sector, the IRS and foreign revenue authorities are less precise. Compliance cost to financial institutions alone has been roughly estimated at US$8 billion a year,[51] approximately ten times the amount of estimated revenue raised. The United Kingdom government has estimated that the cost to British businesses alone will be £1.1 billion to £2 billion for the first five years (approximately two thirds of the estimate total additional global tax revenue expected).[52] According to the Financial Post, the Scotia Bank in Canada has already spent almost $100 million.[53][54] There are few reliable estimates for the additional cost burden to the IRS, although it seems certain that the majority of the cost seems likely to fall on the relevant financial institutions and (to a lesser degree) foreign tax authorities who have signed intergovernmental agreements.

Implementation[edit]

Domestic[edit]

FATCA added 26 U.S.C. § 6038D (section 6038D of the Internal Revenue Code) which requires the reporting of any interest in foreign financial assets over $50,000 after March 18, 2010, 26 U.S.C. §§ 14711474 requiring U.S. payors to withhold taxes on payments to foreign financial institutions (FFI) and nonfinancial foreign entities (NFFE) that have not agreed to provide the IRS with information on U.S. accounts, and 26 U.S.C. § 1298(f) requiring shareholders of a passive foreign investment company (PFIC) to report certain information.

The IRS issued temporary and proposed regulations on December 14, 2011 for reporting foreign financial assets, requiring the filing of Form 8938 with income tax returns.[55][56] Treasury and the IRS issued final regulations and guidance on reporting interest paid to nonresident aliens on April 16, 2012.[57] Treasury and the IRS issued proposed regulations regarding information reporting by, and withholding of payments to, foreign financial institutions on February 8, 2012,[58][59][60] and final regulations on January 17, 2013.[61][62] On December 31, 2013 the IRS published temporary and proposed regulations on annual filing requirements for shareholders of PFICs.[63] On February 20, 2014 the IRS issued temporary and proposed regulations making additions and clarifications to previously issued regulations and providing guidance to coordinate FATCA rules with preexisting requirements.[64][65]

International[edit]

FATCA implementation faces legal hurdles because it may be illegal in foreign jurisdictions for financial institutions to disclose the required account information.[66] There is a controversy about the appropriatenesss of intergovernmental agreements (IGAs) to solve any of these problems.[67]

France, Germany, Italy, Spain, and the United Kingdom have consented to cooperate with the U.S. on FATCA implementation,[68][69] as have Switzerland, Japan [70] and South Africa. The deputy director general of legal affairs of the People's Bank of China, the central bank of the People's Republic of China, Liu Xiangmin said "China's banking and tax laws and regulations do not allow Chinese financial institutions to comply with FATCA directly."[71]

Intergovernmental agreements[edit]

As of March 6, 2014, the following jurisdictions have concluded intergovernmental agreements with the United States regarding the implementation of FATCA.[72] The agreements generally require parliamentary approval in the countries they are concluded with but not the United States. The United States Department of the Treasury has published model IGAs which follow two approaches. Under Model 1, financial institutions in the partner country report information about U.S. accounts to the tax authority of the partner country. That tax authority then provides the information to the United States. Model 1 comes in a reciprocal version (Model 1A), under which the United States will also share information about the partner country's taxpayers with the partner country, and a nonreciprocal version (Model 1B). Under Model 2, partner country financial institutions report directly the U.S. Internal Revenue Service, and the partner country agrees to lower any legal barriers to that reporting.[72] Model 2 is available in two versions: 2A with no Tax Information Exchange Agreement (TIEA) or Double Tax Convention (DTC) required, and 2B for countries with a pre-existing TIEA or DTC. The IGA with Mexico is the only one that has entered into force.[73][citation needed]

Agreements were signed for the following jurisdictions:

JurisdictionTypeSignatureEntry into forceApproval process
partner state
Bermuda2December 19, 2013
Canada1February 5, 2014Implementation act published[74]
Cayman Islands1B[75]November 29, 2013
Chile2March 5, 2014
Costa Rica1A[75]November 26, 2013
Denmark1November 19, 2012
Finland1March 5, 2014
France1November 14, 2013
Germany1May 31, 2013
Guernsey1[76]December 13 2013Draft implementation regulation published[77]
Hungary1February 4, 2014
Ireland1January 23, 2013
Isle of Man1December 13, 2013Draft implementation regulation published[77]
Italy1January 10, 2014
Japan2June 11, 2013
Jersey1December 13, 2013Draft implementation regulation published[77]
Malta1A[78]December 16, 2013
Mauritius1December 27, 2013
Mexico1November 19, 2013
Netherlands1ADecember 18, 2013Not presented to parliament[79]
Norway1April 15, 2013
Spain1May 14, 2013
Switzerland2February 14, 2013Parliamentary approval obtained;[80] insufficient supporters for a referendum[81]
United Kingdom1September 12, 2012Presented to parliament in September 2012[82][a]
Notes
  1. ^ In the UK, formal approval of treaties before ratification is not requirement, although according to the Ponsonby Rule, they need to be laid before Parliament with an explanatory memorandum, which the government did in September 2012

With Canada's agreement in February 2014, all G7 countries have signed treaties to enforce FATCA. Russia, while not ruling out an agreement, requires full reciprocity and abandonment of US extraterritoriality before signing an IGA.[83]

See also[edit]

References[edit]

  1. ^ "The Foreign Account Tax Compliance Act (FATCA)". DLA Piper. 
  2. ^ 111 Cong. Rec. S1635-36 (daily ed. Mar 17, 2010) (statement of Sen. Levin) ("Right now, thousands of U.S. tax dodgers conceal billions of dollars in assets within secrecy-shrouded foreign banks, dodging taxes and penalizing those of us who pay the taxes we owe. The Permanent Subcommittee on Investigations... estimated that these tax-dodging schemes cost the Federal Treasury $100 billion a year.") [hereinafter "Levin statement"], http://www.gpo.gov/fdsys/pkg/CREC-2010-03-17/pdf/CREC-2010-03-17-pt1-PgS1633-8.pdf#page=4
  3. ^ http://www.cbc.ca/news/politics/canadian-banks-to-be-compelled-to-share-clients-info-with-u-s-1.2437975
  4. ^ http://americansabroad.org/files/1413/7848/1535/harvey_2013.pdf
  5. ^ e.g., 26 U.S.C. §§61, 6012
  6. ^ International taxation#Residency
  7. ^ e.g., 26 U.S.C. §1441
  8. ^ U.S. Government Accountability Office (GAO), Offshore Financial Activity Creates Enforcement Issues for IRS: Testimony Before the Committee on Finance, U.S. Senate, March 17, 2009 (statement of Michael Brostek, Director, Strategic Issues Team) at 10, [hereinafter "GAO Report"], http://www.finance.senate.gov/imo/media/doc/031709mbtest1.pdf
  9. ^ a b GAO Report at 10-11
  10. ^ GAO Report at 5 (referring to the FBAR filing requirement)
  11. ^ Levin statement, supra
  12. ^ 111 Cong. Rec. S10,778 (statement of Sen. Max Baucus) ("This bill [S. 1934] would improve tax compliance without raising taxes on anyone. These are taxes that are already legally owed.")
  13. ^ 111 Cong., S.A. 3310
  14. ^ 26 U.S.C. §1471(c)(1)
  15. ^ 26 U.S.C. §1471
  16. ^ a b Bell, Kay (March 23, 2010). "Jobs bill includes tax changes". MSNBC. 
  17. ^ Smith, Lisa. "FATCA – Foreign Account Tax Compliance Act". iExpats.com. Retrieved September 13, 2012. 
  18. ^ 26 U.S.C. §1474(b)(2)
  19. ^ 26 U.S.C. §6038D(a)
  20. ^ e.g., 26 C.F.R. §1.6038D-2T(a)
  21. ^ Internal Revenue Service (January 15, 2013). "Do I need to file Form 8938, 'Statement of Specified Foreign Financial Assets'?". 
  22. ^ 26 U.S.C. §6662(j)(3)
  23. ^ 26 U.S.C. §6501(e)(1); the limitations period was presumably extended because it was determined that international audit cases can take an additional 500 days to fully investigate. GAO Report at 1.
  24. ^ Jaffe & Co | American Tax International. FBAR & FACTA
  25. ^ 26 U.S.C. §871(m); dividends such as those paid by a U.S. corporation are U.S. source and therefore subject to the 30% withholding tax for foreign payees. 26 U.S.C. §§871(1)(A), 861(a)(2). The loophole was based on reclassifying the payment as income derived from the residence of the foreign payee and therefore exempting the payment from U.S. taxation.
  26. ^ Morgenson, Gretchen (March 26, 2010). "Death of a Loophole, and Swiss Banks Will Mourn". The New York Times. 
  27. ^ a b Jolly, David; Knowlton, Brian (December 26, 2011). "Law to Find Tax Evaders Denounced". The New York Times. 
  28. ^ "How to get into compliance with the FBAR?". September 5, 2013. 
  29. ^ 31 C.F.R. 1010 (76 F.R. 10234 of February 24, 2011).
  30. ^ "How to Lose Friends, Citizens and Influence". The Wall Street Journal. July 17, 2013. 
  31. ^ "Adding Up the Costs of Complying with FATCA". Financial Transparency Coalition. September 28, 2011. 
  32. ^ "FATCA may identify tax cheats, but its dragnet for financial criminals may produce an even bigger yield". Association of Certified Financial Crime Specialists. March 1, 2012. 
  33. ^ "Scratched by the FATCA". The Economist. November 26, 2011. 
  34. ^ a b "Why FATCA is Bad for America and Why it Should be Repealed". ACA Reports series 2. American Citizens Abroad. July 19, 2012. Archived from the original on June 1, 2013. 
  35. ^ USA Today (September 27, 2012). "European banks shut Americans out over U.S. tax rules". "Banks lock out Americans over new tax law". CNN. September 15, 2013. 
  36. ^ "Facing up to FATCA". Deloitte. Fall 2011. 
  37. ^ Posey, Bill (July 1, 2013). "Letter to Secretary of Treasury" (PDF). repealfatca.com. 
  38. ^ "Complying With U.S. Tax Evasion Law Is Vexing Foreign Banks". The New York Times. September 16, 2013. 
  39. ^ "Mister Taxman: Why Some Americans Working Abroad Are Ditching Their Citizenships". Time magazine. January 31, 2013. 
  40. ^ Newman, Alex (December 9, 2013). "Amid IRS Abuse, Record Number of Americans Give Up U.S. Citizenship". The New American. Retrieved February 20, 2014. 
  41. ^ "Why are Americans giving up their citizenship?". BBC Magazine. Sep 26, 2012. Retrieved Oct 2013. 
  42. ^ http://online.wsj.com/article/SB10001424127887323455104579014772169287210.html
  43. ^ "Americans renouncing citizenship in record numbers, seek to avoid tax". The Wall Street Journal (Fox News). August 12, 2013. Retrieved February 20, 2014. 
  44. ^ http://www.cbc.ca/news/canada/u-s-fatca-tax-law-catches-unsuspecting-canadians-in-its-crosshairs-1.2493864
  45. ^ Bachmann, Helena (January 31, 2013). "Mister Taxman: Why Some Americans Working Abroad Are Ditching Their Citizenships". Time. Retrieved February 20, 2014. 
  46. ^ Wisconsin Law Review, Vol. 2013, No. 1, pp. 205-236 (April 9, 2013). "Using a Sledgehammer to Crack a Nut: Why FATCA Will Not Stand". 
  47. ^ Shapiro Tax Law LLC (July 6, 2013). "Good news: FATCA deadlines extended, and withholding delayed". 
  48. ^ "Resolution to Repeal the Foreign Account Tax Compliance Act (FATCA)". abolisfatca.com. 
  49. ^ Gravelle JG. (2013). Tax Havens: International Tax Avoidance and Evasion. CRS.
  50. ^ Joint Committee on Taxation, JCS-6-10, Estimated Revenue Effects of the Revenue Provisions Contained in an Amendment to the Senate Amendment to the House Amendment to the Senate Amendment to H.R. 2847, the Hiring Incentives to Restore Employment Act. Referenced: "Why FATCA is Bad for America and Why it Should be Repealed". ACA Reports series 2. American Citizens Abroad. July 19, 2012. Archived from the original on June 1, 2013. 
  51. ^ "FATCA Carries Fat Price Tag". Forbes. November 30, 2011. 
  52. ^ "The cost of complying with FATCA". Lexology. June 3, 2013. 
  53. ^ Greenwood, John (October 23, 2013). "Electronic spying 'a big issue' for banks, Scotia CEO Waugh says". Financial Post. 
  54. ^ Swanson, Lynne (September 17, 2013). "Dual Canadian-American citizens: We are not tax cheats". Financial Post. 
  55. ^ "IRS Releases Guidance on Foreign Financial Asset Reporting". Internal Revenue Service. December 14, 2011. 
  56. ^ 76 F.R. 78553 of December 19, 2011. Codified at 26 C.F.R. 1.6038D-1T et seq. 76 F.R. 78594 of December 19, 2011.
  57. ^ 77 F.R. 23391 of April 19, 2012
  58. ^ "Treasury, IRS Issue Proposed Regulations for FATCA Implementation". Internal Revenue Service. February 8, 2012. 
  59. ^ "Treasury and IRS Issue Proposed Regulations Under the Foreign Account Tax Compliance Act to Improve Offshore Tax Compliance and Reduce Burden". United States Department of the Treasury. February 8, 2012. 
  60. ^ 77 F.R. 9022 of February 15, 2012
  61. ^ "Treasury and IRS Issue Final Regulations to Combat Offshore Tax Evasion". United States Department of the Treasury. January 17, 2013. 
  62. ^ 78 F.R. 5874 of January 28, 2013. Codified at 26 C.F.R. 1.1471-0 et seq.
  63. ^ 78 F.R. 79602 of December 31, 2013. Codified at 26 C.F.R. 1.1291-0T et seq. 78 F.R. 79650 of December 31, 2013. 78 F.R. 79652 of December 31, 2013.
  64. ^ "Treasury Releases Last Substantial Rules Package to Combat Offshore Tax Evasion". Internal Revenue Service. February 20, 2014. 
  65. ^ 79 F.R. 12725 of March 06, 2014. 79 F.R. 12811 of March 06, 2014. 79 F.R. 12867 of March 06, 2014. 79 F.R. 12879 of March 06, 2014.
  66. ^ "Key Aspects of the FATCA Regime". Shearman & Sterling LLP. May 15, 2012. 
  67. ^ Christians, Allison (February 11, 2013). "The Dubious Legal Pedigree of IGAs (and Why it Matters)". Tax Notes International (Tax Analysts) 69 (6): 565. SSRN 2280508. 
  68. ^ U.S. Treasury Department (February 8, 2012). "JOINT STATEMENT FROM THE UNITED STATES, FRANCE, GERMANY, ITALY, SPAIN AND THE UNITED KINGDOM REGARDING AN INTERGOVERNMENTAL APPROACH TO IMPROVING INTERNATIONAL TAX COMPLIANCE AND IMPLEMENTING FATCA". 
  69. ^ Coder, Jeremiah (June 28, 2012). "News Analysis: U.K. Hoping U.S. Will Make FATCA Easier to Swallow". Tax Notes Today. 
  70. ^ Cohn, Michael (June 21, 2012). "U.S. Strikes FATCA Deals with Switzerland and Japan". Accounting Today. 
  71. ^ Flaherty, Michael (November 28, 2012). King, Larry, ed. "China central bank official slams U.S. tax dodging law". Hong Kong: Reuters. 
  72. ^ a b "U.S. Treasury FATCA Resource Center". U.S. Treasury Department. 
  73. ^ U.S.-Mexico IGA, Article 10(1).
  74. ^ "Legislative Proposals Relating To the Canada–United States Enhanced Tax Information Exchange Agreement". Department of Finance, Canada. Retrieved March 5, 2014. 
  75. ^ a b "Bilateral Pacts Represent First FATCA Agreements in the Caribbean". Tax Analysts. November 29, 2013. Retrieved December 3, 2013. 
  76. ^ "2013 TNT 243-23 GUERNSEY ANNOUNCES SIGNING OF FATCA INTERGOVERNMENTAL AGREEMENT WITH U.S..". Tax Analysts. December 18, 2013. 
  77. ^ a b c "TAXATION (International Tax Compliance) (Crown Dependency [CD]) Regulations 2014, Guidance notes". January 31, 2014. Retrieved March 6, 2014. 
  78. ^ "2013 TNT 243-24 MALTA ANNOUNCES SIGNING OF FATCA AGREEMENT WITH U.S..". Tax Analysts. December 18, 2013. 
  79. ^ "Agreement between the Kingdom of the Netherlands and the United States of America to improve international tax compliance and to implement FATCA, treaty data". Ministry of Foreign Affairs (Netherlands). Retrieved March 5, 2014. 
  80. ^ "Internationales Abkommen, Agreement between Switzerland and the United States of America for Cooperation to Facilitate the Implementation of FATCA" (in German). Retrieved March 7, 2014. 
  81. ^ "Entry into force of FATCA agreement between Switzerland and United States was delayed by six months". September 30, 2013. .
  82. ^ "Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA". The Stationery Office. Retrieved March 5, 2014. 
  83. ^ http://rbth.co.uk/news/2013/11/02/moscow_wants_tax_information_exchanges_with_us_to_be_mutual_balanced_31406.html and http://www.mid.ru/brp_4.nsf/newsline/F422FC5604891F1344257C1700419F07

External links[edit]