The Overreach of FATCA
The Foreign Account Tax Compliance Act (FATCA) stands as one of the most arrogant and one-sided laws ever enacted by Congress.
This legislation significantly impacts the average American trying to do business offshore.
Understanding FATCA
The impact of FATCA forces what the law calls “foreign financial institutions” (FFIs) to disclose to the IRS the financial dealings of all “US persons” they deal with.This applies even if it breaks their country’s banking and privacy laws.
As of July 2014, a 30% withholding tax will apply to many money transfers out of the USA to FFIs that aren’t willing to work under the regulations.
In other words, the non-compliers are effectively blocked from doing business with anyone in the USA—or indeed in US dollars at all.
- The definition of an FFI (foreign financial institution) is broad. It includes banks, broker/dealers, insurance companies, hedge funds, and private equity funds.
- A US person includes US citizens, US tax-resident foreign citizens, and domestic trusts, partnerships, corporations, or estates.
FATCA’s Impact on US Citizens Abroad
One significant consequence of FATCA is that thousands of FFIs worldwide have opted to sever ties with their US customers to avoid the regulatory burden.
This has made it particularly challenging for millions of Americans living abroad to maintain normal financial relationships in their host countries.
Many have experienced bank account closures and mortgage cancellations. They also report increased difficulties in international business dealings due to their foreign partners’ reluctance to risk IRS conflicts.
A Glimmer of Hope
Despite the challenges, there is some promising news on the horizon.
Many FFIs are not keen to face the IRS alone and have sought help from their governments. A growing number of these governments have agreed to collect the required information from their banks and provide it to the IRS, thus relieving the banks of their direct reporting responsibilities.
To date, around 15 countries have entered into such agreements with the IRS. This includes Costa Rica, Denmark, France, Germany, Ireland, Mexico, Norway, Spain, and the UK, as well as the Cayman Islands and other UK territories. Luxembourg and Singapore have also committed to similar agreements.
This could potentially make FFIs more willing to engage with US clients again, as the reporting burden would shift to their governments.
But many countries, including Switzerland and Japan, have not made such agreements, leaving their FFIs hesitant to accept US clients.
While these developments offer a measure of relief, FATCA’s broader impact remains troubling.
The law’s enforcement through foreign governments can be seen as an overreach of US authority. And there are significant concerns about the misuse of collected data by criminals and terrorists.
Recommended Reading
Need Help?
Since 1984, we’ve helped more than 15,000 customers and clients protect their wealth using proven, low-risk domestic and offshore planning. To see if our planning is right for you, please book in a free no-obligation call with one of our Associates. You can do that here.
