FATCA, or the Foreign Account Tax Compliance Act was passed as part of the HIRE act of 2010. Designed to take United States tax compliance beyond the borders of the United States and into foreign territories to prevent the loss of potential billions of dollars in tax revenue, FATCA tightens compliancy standards and increases transparency for U.S. nationals with offshore assets while at the same time bringing harsh punishments to any that don’t fulfill the full requirements of the law. The legislation has potential ramifications for any company or entity with U.S. clients or assets generating U.S. sourced income. The responsibility for tax reporting and compliance shifts to any company holding or trading U.S. assets for others. Compliance includes a thorough client identification process; noncompliant entities suffer a 30% tax withholding.
While the major targets of FATCA are U.S. persons with asset interests outside the United States, the documentation required for compliance and client identification means institutions without U.S. clients or investors will also be very seriously affected. The broad definition of a Foreign Financial Institution (FFI) as defined in the legislation includes every member of the investment community including banks, asset managers, brokers, funds and even insurance companies. Disclosure includes holder details including full birth name, address, any account numbers and the balances of applicable accounts, gross receipts and payments or withdrawals.
The overreaching of U.S. tax law could lead to several possible/probable outcomes for businesses. First, businesses will consider the value of holding U.S. investments and clients. Smaller, specialized financial firms may cut their losses and completely withdraw from U.S. investors or markets after determining the cost of compliancy outweighs the loss of clients. Businesses will also need to take a close look at who exactly is responsible for the 30% tax liability for non-compliance events. Information about each client will have to be current, complete and available in an electronic format. The laborious process of gathering such data and maintaining it will lead to burdensome strategic administrative decisions. Additionally, there are issues with how the information is reported, maintained, gathered and whether or not any of this process can be automated. Legal ramifications also exist in jurisdictions where the disclosure of personal information to foreign governments exists. This includes banking secrecy laws such as found in Switzerland where the IRS has already targeted the Swiss banking industry.
The far-reaching and invasive nature of the FATCA legislation has divided opinion and consensus among investors, brokers and financial institutions globally. Raising more questions about process and enforcement, the law raised eyebrows and vocal dissent in the financial community. How does the United States expect companies in other countries to comply with extra-territorial law? How will the U.S. enforce it’s own laws in other countries? The FATCA rules are designed to control the outflow of capital from an already weakened (and increasingly weaker) U.S. financial system. For Americans seeking asset protection through an international campaign now is the time to open an offshore bank account, before it becomes increasingly difficult and more expensive to do so.