Every accountant worth his salt would be clearly aware of FATCA and its implications on accounting. For the uninitiated FATCA stands for Foreign Account Tax Compliance Act and is aimed at improving the tax compliance of U.S taxpayers with who have financial assets or bank accounts outside the United States. foreign financial assets and offshore accounts.
When the Act was initially enacted in 2010, it barely received any attention from the accounting world, but as the provisions started coming into effect over time, all stakeholders (individuals, financial institutions and even foreign governments) are outraged by some of the expectations of the Act. We will specifically look at some of the challenges that this act poses to foreign banks.
FATCA includes some tough provisions to ensure compliance by Foreign Financial Institutions (FFIs). Regardless of whether the recipient is a US tax payer, the Act allows a 30% withholding tax to be imposed on US source payments to FFIs which refuse to disclose the financial account details of US tax payers to the IRS.
There are also massive financial penalties on individuals who fail to comply with the filing requirements of the Act. Some of these requirements are an essential waste of time – imagine a penalty of $10000 on US expats for failure to file the FBAR (Foreign Bank and Financial Accounts) form which does not contain any new information when compared to existing tax forms!
The Act allows the US government to access the finances of non- US tax payers who may be associated with a US taxpayer either personally (spouse, parent, child or even a friend who may have a joint account) or professionally.
The financial penalties for non-filing of the American tax forms, in the case of joint accounts, would be applicable to the non-American individuals as well. Americans themselves may consider giving up their passport in order to avoid the hassles of compliance and more importantly, to be able to continue evading tax.
An FFI shall enter into an agreement with IRS on three key areas – documentation, withholding and reporting. Documentation covers areas such as obtaining sufficient information on accounts and complying with verification and due diligence procedures so as to be able to identify which of those are US accounts.
From a bank’s perspective, the cost of servicing a U.S customer has increased as they are now expected to determine the citizenship of all account holders. For a large bank in Europe, this compliance cost alone can be as high as $100 million. One of the problems with this is that banks may take a judicious analysis of the risk reward ratio of servicing US customers and decide to stop offering their services to US tax payers.
The repercussions are already being felt with banks such as HSBC announcing that they may stop certain services to Americans. One has to remember that FATCA is not just another tax compliance requirement from US. It has far reaching implications across the entire banking system and need vast changes in processes and IT systems that handle all aspects starting with account opening to MIS reporting. As the compliance date approaches (in 2014), one may see more banks taking a tough stance when it comes to servicing US citizens.
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Nicolas D’Alleva is a staff writer for HIG Accounting, a Philadelphia accounting firm and the owner of Spotted Frog Design, a Philadelphia web design company. If you are interested in guest posting, please take a moment to review the guest posting guidelines.