Thursday, May 3, 2012

Alert! FATCA - Foreign Account Tax Compliance Act

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A brief synopsis of FATCA (The Foreign Account Tax Compliance Act) follows, excerpted from Wikipedia, a wonderful source of information. The reason I chose not to cull any information from either IRS-sponsored sites or Tax Consulting (principally sponsored by large CPA auditing and tax practitioner or tax law advisory firms) Sites was because of the obvious bias associated with both of these these types of sites. [By the way, for some reason, FATCA is difficult to pronounce without making it sound like VODKA - It's ironic. Also, if you add a "T" to the end of it, it spells "FATCAT."] This is my way of whistling past the graveyard -- to lighten up a frightful topic.

Why Wikipedia? [you ask, albeit silently]

The IRS-sponsored sites extol the virtues of this "helpful" legislation because it will make it more difficult for all evil-minded {a bit of sarcasm intended) companies, funds and persons of burdensome wealth and income to escape the reaper. FATCA is yet another means through which the United States Government can increase both its jurisdiction and collections. Of course, what the Government will do with the collected proceeds should make for exciting future discourse.

The Tax Consulting sites are veritably licking their chops at the opportunity to earn additional profits through fees generated regarding compliance with the relatively new but profoundly far-reaching law, and the justifiable aura of fear that surrounds it.

Hence, from our friends at the sadly underfunded yet indispensable Wikipedia:

The Foreign Account Tax Compliance Act (FATCA), Subtitle A of Title V of the Hiring Incentives to Restore Employment Act (HIRE), enacts Chapter 4 of, and makes other modifications to, the Internal Revenue Code of 1986, the tax law of the United States.

FATCA has a few main parts:
  1. It requires foreign banks to find any American account holders and disclose their balances, receipts, and withdrawals to the US Internal Revenue Service (IRS), or be subject to a 30% withholding tax on income from US financial assets held by the banks.[1]
  2. Owners of these foreign-held assets must report them on a new Form 8938 along with US tax returns if they are worth more than US$50,000; a higher reporting threshold applies to overseas residents.[2] Account holders would be subject to a 40% penalty on understatements of income in an undisclosed foreign financial asset.[1]
  3. It closes a tax loophole that investors had used to avoid paying any taxes on dividends by converting them into dividend equivalents.[3]
The reporting requirements are in addition to reporting of foreign financial assets to the US Treasury Department,[4] particularly the "Report of Foreign Bank and Financial Accounts" (FBAR) for foreign financial accounts exceeding US$10,000 required under Bank Secrecy Act regulations issued by the Financial Crimes Enforcement Network (FinCEN).[5]

There are fears of imposition of capital controls, and assertions that capital flight is underway as a result.[6][7] There have also been privacy concerns, in particular for those with dual citizenship.[8] As a result of FATCA, European banks such as Deutsche Bank, Commerzbank, HSBC, ING Group and Credit Suisse have been closing brokerage accounts for all US customers since early 2011 citing "onerous" US regulations,[9][10] which FATCA will make more complex when it goes into effect in 2014.[11] American Citizens Abroad, a Geneva-based organization representing the interests of 6 million Americans residing outside the U.S., has launched a campaign to repeal FATCA.[12] Many have expressed doubts as to the implementability of this legislation.[13]

FATCA added Internal Revenue Code § 6038D (26 U.S.C. § 6038D) that requires reporting any interest in assets over $50,000 after 18 March 2010, and § 1298(f) (26 U.S.C. § 1298(f)) that requires shareholders of a passive foreign investment company (PFIC) to report certain information. The IRS issued temporary regulations (TD 9567) on 14 December 2011 requiring the filing of Form 8938 with individual income tax returns,[14] and proposed regulations (REG-130302-10) for domestic entities.[15] Treasury and the IRS issued proposed regulations (REG-121647-10) regarding information reporting by foreign financial institutions on 8 February 2012,[16][17] and issued final regulations and guidance (TD 9584) on reporting interest paid to nonresident aliens on 17 April 2012.[18]
Five countries have consented to co-operate with the U.S. on FATCA implementation.[19]

 What FATCHA Could Mean To You:

While I offer no tax, accounting, investment or legal advice, I do offer the following general thoughts for your consideration...

1.  There are no offshore or out-of-country (foreign) tax shelters for U.S. citizens or entities owned directly or indirectly, in whole or in part, by U.S. - domiciled interests or persons;

2.  There will no longer be any such thing as a private or secret overseas or offshore bank or brokerage account for anyone except a very privileged few (and you know who you are, you lucky sports, you);

3.  Many multinational funds (public and private), as well as many international or multinational firms will have more rigorous and expensive compliance standards;

4. There will be more fines and prosecutions (civil and criminal) for anyone daring to tread into any seemingly gay area of the Internal Revenue Code; and, sadly,

5. Fewer and fewer reputable foreign financial institutions will want to conduct any type of savings, trust or investment transactions or business with any persons or entities described in item numbered 1, above.

As a closing note, I believe, as a trend-spotter and as the author of The Global Futurist Blog, that FATCA will ultimately have the effect of  decreasing the US tax base (due to an increase in renunciation of U.S. citizenship and flight or re-domiciliation of U.S. domiciled entities), and increasing the tax burden on the shrinking tax base. In the short run, this might be a good mechanism for collect more money to fund a government which has lost the faith of too many of its citizens (i.e.,#occupy, #bailout, and the like). In the longer run, it might just serve to prove the oft-quoted philosophy that "The Power To Tax Is The Power To Destroy."

Douglas E. Castle

The Internationalist Page Blog and The InfoSphere Business Alerts And Intelligence Blog

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