16 December 2013

US Foreign Account Tax Compliance Act

The Foreign Account Tax Compliance Act (FATCA), which is part of the US Hiring Incentives to Restore Employment Act of 2010, aims to combat tax evasion by US tax residents using foreign accounts. It includes certain provisions on withholding taxes and requires foreign financial institutions (FFIs) outside the US to pass information about their US customers to the US tax authorities, the Internal Revenue Services (IRS). Failure to meet these new reporting obligations would result in a 30% withholding tax on the financial institutions for payments of U.S. source income, gross proceeds of sales of property that could produce U.S. income, and passthru payments.

The FATCA provisions impose new and substantial burdens on FFIs in identifying US taxpayers, and registering and reporting information to the IRS. 

FATCA focuses on reporting:

  • By U.S. taxpayers about certain foreign financial accounts and offshore assets
  • By FFIs about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest

The objective of FATCA is the reporting of foreign financial assets; withholding is the cost of not reporting.

An Intergovernmental Agreement (IGA) makes it easier for partner countries to comply with provisions of FATCA. The IGA Model I provides for a partnership agreement between the U.S. and partner jurisdiction whereby FFIs in partner jurisdictions will be able to report information on U.S. account holders directly to their national tax authorities, who in turn will report to the IRS.

1 comment:

Expatriate Tax Services said...

The US government needs to find ways on how to track tax evaders who uses foreign accounts.