FATCA was written into US legislation as a part of the Hiring Incentives to Restore Employment (HIRE) Act, which requires individuals to declare any assets held in accounts outside of the United States, and foreign financial institutions (FFI) to report to the Internal Revenue Service (IRS) information on their American clients and accounts.
Its aim is to prevent tax evasion by US citizens who hold assets outside of the United States, by imposing stiff penalties upon FFI’s and individuals who do not comply with the new measures.
FATCA forces FFI’s around the globe to report the names, account numbers and asset holdings either directly to the IRS or to their respective local tax authorities, who in turn report this information to the IRS. Because of the all-encompassing nature of this new legislation, situations have arisen in some jurisdictions in which FATCA compliance would result in a violation of client privacy by the banking institution. Still, FATCA remains statutory and has gone into effect.
It has indeed been cause for much controversy and debate, but as of 2010 it is a legal obligation, which could affect you if you hold assets in accounts outside the US whose total combined value exceeds $50,000 and are:
- A US citizen residing either in the US or abroad
- Married to a US citizen including those living outside the US
-A holder of a US green card or Social Security number
Even as a legal resident or dual citizen of another country, so long as you meet any of the above criteria, FATCA still applies to you. All US citizens must file an income tax return with the IRS annually, regardless of country of residence or domicile. As of December 14, 2011 the form 8938 (reporting foreign assets) must also be filed along with the regular tax return, or a penalty of 40% will be incurred for non-compliance.
FFI’s that do not register with the IRS and become a “Participating Member” will be penalised by a 30% withholding tax from any and all income originating from the US. Individuals that fail to report their offshore assets in full to the IRS will have their foreign account deemed “recalcitrant” and all US-source income becomes subject to the same 30% withholding tax by the foreign institution in which the account is held, payable to the IRS.
Since the enactment of FATCA, there have been instances in which foreign banks have refused to open new accounts for US citizens, due to concerns over the new regulations. Many US expats have been scared out of the international investment market completely, or even opted to renounce their citizenship in order to keep their offshore investments out of reach of the IRS. There are other solutions. While it is necessary as an American citizen to remain compliant with US regulations, there are options available for those who seek the right advice, that will allow for their tax obligations to be upheld while allowing their offshore investments to remain lucrative. If you are a US citizen and hold assets offshore, Chartercross can help you find tax efficient alternatives to get the most out of your foreign investments.