What is FATCA?

FATCA (Foreign Accounts Tax Compliance Act) is a federal law passed by the United States of America with the intent to enforce the requirement that all US persons living outside of the US file reports on non-US financial accounts. It was enacted as part of the Hiring Incentives to Restore Employment Act of 2010, aimed at creating domestic jobs.

FATCA does not actually produce any direct requirements on US persons with financial accounts outside of America; as the law’s explicit requirements are directed at financial institutions. The act states that all designated non-US financial institutions must review their account holders for any US persons, and then report such identities and assets to the US Department of Treasury whereby the account exceeds a minimum end-balance of $50,000.

US Persons should already have long been reporting certain foreign financial accounts on their FBAR (Foreign Bank And financial account Report) in accordance with the Bank Secrecy Act of 1970. However, FATCA seeks to force foreign financial institutions to report on US persons for them. In the past, some of those living abroad could have been failing to report through either ignorance of the complicated US tax code, or through willful evasion.

The goal of FATCA is to bring more US persons up to normal compliance with IRS tax code, and prevent tax evasion. The Association of Certified Financial Crime Specialists estimates that the act should raise US Treasury revenues by up to $800 Million per year.

Primary Criticisms

While the spirit of FATCA is logical, that people should report and pay taxes where they are legally obligated, the act has received widespread criticism from multiple angles.

Foreign Nation’s Individual Sovereignty: By forcing foreign tax authorities and foreign companies to deal with FATCA, the US could essentially be forcing nations to break their own privacy laws. This is viewed by legal professionals to be a breach of a nation’s sovereignty.

Global Cost of Implementation: While FATCA hopes to raise up to $9 Billion over the next decade for the IRS, it comes at a considerable cost to the rest of the world. The total cost to global financial institutions in order to update their compliance departments, legal departments, IT software, data protection systems to safely share necessary data, etc., is anticipated to be $291 Billion. This figure only reflects the private-sector cost of implementation, and does not include the additional cost to US tax-payers to implement FATCA. Contrary to standard Congress processes, FATCA passed without any cost-benefit analysis.

Cost to US Citizens Abroad: While FATCA aims to stop the few tax cheats, the overwhelming majority of people affected by the act will be ordinary men and women living and working abroad. In addition to extra paperwork, filing costs, and headaches, US persons now face heavy restrictions on even the most basic financial services, such as savings accounts, retirement accounts, or life insurance. Numerous financial institutions have also denied services to Americans, or removed existing American clients in order to not have to deal with the undue cost of implementing FATCA. US persons living abroad could also be treated quite punitively by the IRS if they are to invest in certain non-US domiciled investments. At the same time, while living outside the states, these same Americans are often not legally allowed to invest in the US-domiciled investments that the IRS wants them to invest in.

Capital Flight and other Indirect Costs to the US Economy: Also not included in the above $291 Billion cost of implementation is the economic cost of foreign financial institutions divesting any amount of US assets or US investments as a result of FATCA. In addition to this is the indirect and difficult to calculate cost of any and all non-financial institution that would have sought to do business with America or American companies, but decided to take their business elsewhere as a result of FATCA.

Identity Theft and Data Breach Risk: With thousands of financial institutions around the world sharing data on millions of individuals, there is a real potential for identity theft or a data breach of sensitive personal information; similar to the risks involved with having internationally shared tax identification numbers. This is another cost which is difficult to accurately calculate, but is no doubt a serious security risk.

All US Persons living abroad should be familiar with at least the basic implications of FATCA, and what is reportable each year on their FBAR forms.  Accordingly, with proper planning and consideration, arranging your financial affairs with the right accounts and investments can ensure seamless reporting.

[Sources]

– Shearman And Sterling LLP: Client Report: Key Aspect of The FATCA Regime, 2012
– US Finance Senate; Republics Overseas Inc. April 14th, 2015
– 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
– IRS government webpage

 

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What is FATCA?
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What is FATCA?
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FATCA legislation explained. Who does FATCA affect? What is FATCA reporting?
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