Stay informed on compliance updates
The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, creates a new information reporting and withholding regime for payments made by U.S. citizens and U.S.based companies to foreign financial institutions. The goal of the law is to increase transparency into unreported, taxable income of U.S. taxpayers (both individuals and business entities) with foreign-held accounts.
The Unites States estimates that offshore tax evasion results in the loss of tens of billions of dollars per year. Unlike most countries, the U.S. requires its citizens and businesses to provide the Internal Revenue Service with financial information regarding their foreign financial accounts and offshore assets, if these are in excess of $10,000. More than 8.7 million Americans live abroad, yet fewer than one million of them file the year-end tax forms required for foreign accounts.
To verify the existence and amounts of foreign accounts held by U.S. taxpayers, FATCA requires foreign institutions to present data on U.S. taxpayers with accounts in excess of $50,000. Foreign institutions across the globe are compelled to enter into an agreement with the IRS to provide this information; otherwise, FATCA will impose a 30 percent withholding tax on their U.S. source income, including the gross sales proceeds of certain U. S. assets.
This “big stick” is having the desired effect. In advance of the law’s effective beginning date of July 1, 2014, many foreign banks had dispatched letters to their U.S.based account holders to determine whether or not they had disclosed their foreign bank accounts to the IRS. If the taxpayer had not reported this information, the consequences would include stiff civil penalties and possible criminal charges. The early actions by the banks indicated the seriousness with which they were responding to the law.
As of January 1, 2016, 112 counties have signed an Intergovernmental Agreement with the U.S. to comply with FATCA, and more than two dozen others have reached “agreements in substance.” More than 75,000 financial institutions have now registered with the IRS.
Foreign jurisdictional compliance with FATCA requires more than entering into an agreement with the IRS. Financial institutions also must ensure they have proper processes, systems and controls in place to comply with the intent and scope of the law, as well as a means of storing and tracking all the new data associated with FATCA compliance. As some countries develop similar versions of the law and others take actions toward the development of a global standard, financial institutions need flexible processes and IT architectures to adapt to the evolving landscape.
This is good news for U.S. citizens, given the financial impact of tax evasion on the U.S. Treasury. It is also good news for those countries that have developed their own versions of FATCA, setting in motion a new world order that tax evasion will no longer be tolerated. Nevertheless, the IRS (and tax entities in countries that have implemented rules similar to FATCA) must be flexible in imposing deadlines for compliance, given the difficulties and costs for authorities to re-engineer tax processes and enhance IT systems. To date, this flexibility seems to be in place.
To learn more about how CT can help you better manage your Compliance and Governance needs, contact a CT representative at 855-316-8948 (toll-free US).
More in Global Services
More in Staying Compliant