FATCA: Origins and Intent
FATCA, or the Foreign Account Tax Compliance Act, is considered by some to be one of the most overreaching laws ever enacted by Congress.
Passed in 2010, FATCA aims to compel other countries to enforce US tax laws, even through the confiscation of foreign assets if necessary.
Initiated by President Obama, who pledged to end offshore tax havens, FATCA assumes that Foreign Financial Institutions (FFIs) will enforce US tax regulations.
Failure to comply subjects these institutions to a 30% withholding tax on any US-source income, such as interest, dividends, and rents.
The definition of a Foreign Financial Institution (FFI) is broad. It includes banks, broker-dealers, insurance companies, hedge funds, and private equity funds.
These institutions can only avoid this tax by acting as unpaid informants for the IRS.
Non-US persons investing in the US are also affected. If their foreign bank isn’t FATCA-compliant, their US income is taxed at 30%.
FATCA: Compliance and Global Impact
This withholding was set to begin in July 2013, but the complexity and cost of implementing FATCA caused the IRS to extend the deadline to July 1, 2014.
One might think FFIs and their host governments would resist this law, but the threat of being excluded from the vast US market has led most to comply.
Consequently, FATCA and similar regulations have caused many FFIs to sever ties with US clients.
Today, only a small fraction of non-US banks allow US citizens or permanent residents to open accounts, leaving Americans with few options outside of IRS-compliant banks.
Expansion of FATCA Globally
The global reach of the Foreign Account Tax Compliance Act is expanding as other countries adopt similar laws, forcing residents to disclose offshore financial relationships and pressuring neighboring countries to participate.
For instance, Colombia demanded Panama sign a tax information exchange agreement to report Panamanian accounts held by Colombians. But Panama refused, likely to protect its wealthy Colombian clients.
The US wields significant influence, but even here, challenges to FATCA are emerging.
The agreements signed with other countries require reciprocal tax data exchange, but US law lacks the mechanisms to compel US banks to share information with foreign tax authorities.
Countries like Germany, China, and India have begun asking for data on their citizens investing in the US, but the US has been unable to comply.
President Obama sought to change this. But with a Republican majority in Congress and a resolution from the Republican National Committee calling for FATCA’s repeal, significant change seemed unlikely before the 2016 elections.
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