(This is an important update to a posting originally published Nov. 9, 2012).
I've written extensively in this blog about the destructive effects of an ill-conceived law championed by President Obama—the Foreign Account Tax Compliance Act of 2010.
Among many other statist provisions, FATCA demands that virtually every foreign financial institution (FFI) sign and strictly comply with a reporting and withholding agreement with the IRS with respect to US account holders. The IRS refers to an FFI that signs such an agreement as a “participating FFI.” So-called “non-participating FFIs” will be subject to a 30% gross withholding tax on certain "withholdable payments."
Foreign entities that are not financial institutions are referred to as "non-financial foreign entities" (NFFEs). They are subject to less onerous requirements to avoid FATCA withholding. NFFEs need only provide a withholding agent with the name, address and taxpayer ID number of each of its “substantial U.S. owners,” or to certify that it does not have any substantial U.S. owners. A substantial U.S. owner any “specified US person” with:
- A greater than 10% ownership interest in the entity, or
- Any equity interest in the entity if it is an investment vehicle or an insurance company
Unless certain exceptions apply with respect to the account or the payee, the FFI agreement requires participating FFIs to collect and report to the IRS information with respect to:
- U.S. persons that hold “financial accounts,” and
- Substantial U.S owners of certain NFFEs
FFI agreements also require participating FFIs to withhold 30% of payments to non-participating FFIs and any account holder at the FFI that fails to provide the information that the FFI has agreed to provide the IRS ("recalcitrant account holders”).
Originally the FATCA withholding tax was slated to come into effect on Jan. 1, 2013, but now the IRS has announced it will phase in withholding beginning Jan. 1, 2014 (IRS Announcement 2012-42).
- On Jan. 1, 2014, FATCA withholding on fixed, determinable, annual, periodical (FDAP) income payments to non-participating FFIs and recalcitrant payees begins.
- On Jan. 1, 2017, FATCA withholding on gross proceeds payments to non-participating FFIs and recalcitrant payees begins. The 30% withholding tax applies to the gross proceeds from the sale or other disposition of any property of a type which can produce FDAP income, such as interest or dividends, from sources within the United States.
- No earlier than Jan. 1, 2017, withholding on foreign pass-through payments begins.
FATCA is a textbook example of a law with unanticipated consequences. While those championing FATCA (beginning with President Obama) would never admit it, FATCA has grave implications for the United States. I believe that unless Congress repeals or indefinitely delays implementation of FATCA, inbound investments by foreigners will collapse. Foreign direct investment in the United States has already declined nearly one-third since 2008. How many wealthy investors will want to invest in the United States when they learn that 30% of the gross proceeds of their U.S. investments might be confiscated upon repatriation?
Another and possibly intentional consequence of FATCA is that thousands of foreign banks, trust companies, and other entities have terminated their relationships with U.S. customers. The easiest way for a FFI or NFFE to comply with FATCA is simply certify that it has no U.S. clients. This opportunity is specifically written into the law. If you were the chairman of the board of directors of an offshore bank, would you want to risk having 30% of capital invested in the United States confiscated?
Unfortunately, I'm not at all confident that Congress will have the political courage to repeal FATCA. After all, doing so would deprive them of a bully pulpit against "offshore tax-evaders" they claim, without a shred of proof, are illegally depriving the U.S. Treasury of up to $150 billion annually of tax revenues. Even if Congress does so, I believe President Obama would probably veto the repeal.
I’ve predicted for some time that virtually all offshore banks will become FATCA compliant. Most will do so by jettisoning their U.S. clients. However, the U.S. market for offshore services is simply too big to ignore. Some FATCA-compliant offshore banks remain willing to offer services to tax-compliant U.S. clients.
In the last few months, I’ve been able to assist clients in opening accounts at a handful of very safe private banks in Switzerland and Austria. If your offshore bank has informed you that it is closing your account, and you have at least $500,000 to redeploy to an alternative offshore institution, contact me at . I’d be happy to discuss your options with you.
Copyright © 2012 by Mark Nestmann
