The Obama administration continues to work diligently to crack down further on U.S. citizens and residents who invest offshore. One of those efforts has now come to fruition. The “Foreign Account Taxpayer Compliance Act” (FATCA) is neatly tucked into a jobs bill, cleverly entitled the Hiring Incentives to Restore Employment (HIRE) Act, H.R. 2847.
Here’s a summary of the offshore-related portion of this legislative train wreck:
* Imposes a 30% withholding tax on many types of U.S-source income and gross sales proceeds to foreign financial institutions (FFIs). The definition of an FFI includes every conceivable foreign investment vehicle. The only way to avoid the tax is for the foreign institution to enter into an information reporting agreement with the IRS. Information the IRS would receive includes your name, address, Social Security number or other taxpayer identification number, account number, and the account balance or value. This provision comes into effect on Jan. 1, 2013 (subsequently delayed until Jan. 1, 2014).
* Imposes a separate 30% withholding tax on payments made from the United States to certain non-financial foreign entities. If you’re a foreigner with U.S. investments, and you hold those investments through a foreign corporation or other non-U.S. entity, this provision will affect you. To avoid the tax, you’ll need to disclose whether the foreign entity has “substantial” U.S. owners (10% or greater interest). The burden to make this disclosure will fall upon U.S. “withholding agents.” If the withholding agent (e.g., a domestic bank) fails to obtain the certification the IRS demands, it must withhold 30% of the payment to the foreign entity. This provision also comes into effect on Jan. 1, 2013 (subsequently delayed until Jan. 1, 2014).
* Expanded offshore account reporting obligations. If you’re a U.S. citizen or permanent resident and hold foreign “bank, brokerage, or ‘other’” financial accounts with an aggregate value of $10,000 or more, you must already make two separate annual disclosures. The first disclosure is to the IRS on Schedule B of Form 1040. The second is to the U.S. Treasury on Form TD F 90-22.1. However, if the aggregate value of assets you hold offshore exceeds $50,000, FATCA imposes additional reporting obligations. It requires you to also report any ownership of non-U.S. securities, any financial instrument or contract held for investment from a foreign issuer, and any interest of more than 10% in any foreign entity. For investments in financial institutions engaged in trading securities, partnership interests, or commodities, you must report any ownership interest. These expanded reporting requirements become effect Jan. 1, 2011.
* Extended statute of limitations. FATCA also extends the statute of limitations on assessments to six years for significant omissions of income attributable to foreign financial assets.
* Expanded reporting requirements for shareholders in offshore mutual funds. You must now file Form 8621 annually if you own offshore funds, whether or not you have taxable income or gain from it.
* Expanded definition of U.S. beneficiary of a foreign trust. The Tax Code provides that the U.S. grantor of a foreign trust with a U.S. beneficiary is taxed on trust income. Essentially, the IRS ignores the foreign trust for tax purposes. FATCA expands the definition of U.S. beneficiary to include any U.S. person who may receive an interest in the trust contingent on a future event, or where the trustee has discretion to make a distribution to that person. The trust is treated as having a U.S. beneficiary unless the trust identifies the class of persons to whom distributions may be made and none are U.S. persons. Further, a property transfer from a U.S. grantor to a foreign trust creates a presumption that a foreign trust has a U.S. beneficiary.
FATCA imposes much more stringent reporting and information exchange requirements on foreign financial institutions. For that reason, I believe its main effect will be to further restrict access for U.S. citizens—especially those living in the United States—from offshore banks, brokers, and other foreign financial services companies. This is likely to occur because the cost for these companies to continue doing business with Americans will increase sharply when these portions of the law become effective in 2014.
Copyright © 2010 by Mark Nestmann
(An earlier version of this post was published by The Sovereign Society, http://www.sovereignsociety.com)