It’s been five years since the Foreign Account Tax Compliance Act (FATCA) became law and while the intentions were good – to crack down on those hiding money offshore and avoiding taxes, compliance comes at a price for individuals and corporations.
"The upside of FATCA is that it is forcing tax cheats out of the shadows and keeping more money in the U.S. But for those living abroad, we have yet to see a positive impact from FATCA.," says David McKeegan, founder of Greenback Expat Tax Services, which prepares U.S. federal tax returns and consulting for Americans living abroad.
The applause pretty much stops there.
"FATCA has brought many nuances to U.S. citizens, green card holders, as well as corporations," says David Hryck, a partner, specializing in taxes with the law firm of Reed Smith.
U.S. individuals who have foreign accounts have always been required by law to report them and pay tax on the income. However, some people didn’t comply and foreign banks were not required to report the accounts to the IRS. Now, the foreign banks will report accounts of U.S. persons to the IRS, forcing U.S. accountholders to report their foreign accounts or face possible prosecution, explains Warren Whittaker, a partner in the law firm of Day Pitney, who specializes in international estate planning and related income tax, corporate and personal financial planning.
ZM Ishmurzina, partner at Artio Partners, a CPA firm specializing in expat tax consulting and preparation for U.S. expats and foreign nationals, says FATCA has had a negative impact on many of the firm’s clients. "FATCA violates the privacy rights of an individual by requiring foreign financial institutions report the values of accounts owned by U.S. persons. Secondly, U.S. taxpayers might be subject to substantial fines and penalties for failure to report their foreign financial accounts. Consequently, FATCA violates several Amendments."
The landscape has changed dramatically for Americans banking overseas, especially those living abroad. "Expats have had their account summarily closed without warning, and those who seek to open new accounts are being turned down. The problem is more common with smaller banks that don’t have the financial resources to comply with the extensive filing requirements of FATCA. It can be a hassle for U.S. residents to find an international bank or investment broker who will work with them," says McKeegan. There are some reports that some investment options are no longer sold to Americans.
Frankly put, "It has gotten extremely difficult for American expats to operate day to day with their banking abroad. People are upset about this, because it has complicated their lives and their hands are tied in this regard," says Vincenzo Villamena, managing partner of the CPA firm Online Taxman, which specializes in tax preparation for entrepreneurs and U.S. expats.
It’s not just individuals facing burdensome challenges, but companies as well. "Corporations with accounts at foreign financial institutions will find themselves having to answer more questions about their corporate structure, and if they have ownership by U.S. persons, they will have to provide additional information, including details on individuals holding more than 10% ownership," says John Atkinson, director, Protiviti.
Some of the biggest issues for financial institutions have been around gaining sufficient understanding of the complex FATCA rules in order to structure a compliance program that meets all requirements in a cost-effective way and keeps the institution out of hot water with the IRS, he adds.
Foreign corporations have the mother of all migraines because of the recordkeeping, reporting and compliance requirements that must be in place in order to avoid withholdings on U.S. interest, dividends and gains that may be payable to the foreign financial institution.
"Foreign companies doing business in the U.S. will have to declare what type of entity they are on a complicated new form W8BEN-E. I have received many inquiries regarding this form. Sometime it’s easy to fill out, sometimes complex, depending on the type of company, but it puts companies in a compromising position where they have to wait for payments until they are ‘FATCA approved’, " says Villamena.
The Organization of Economic Cooperation and Development in July of last year released a Standard for Automatic Exchange of Financial Account Information in Tax Matters, including a Common Reporting Standard (CRS). The CRS seeks to establish the automatic exchange of tax information as the new global standard. The automatic exchange of information involves the systematic and periodic transmission of "bulk" taxpayer information from the country which is the source of payment to the taxpayer’s country of residence.
"This is important, because while there were some regions of the world, prior to FATCA, that exchanged information resulting in tax revenue generation, then the U.S. introduced FATCA to increase tax revenue generation. Now, the OECD’s CRS will help facilitate many countries in their journey to increasing tax revenue generation. The end result of all these tax revenue generation activities will lend itself to a more globalized tax world," points out Laurie Gentz, head of compliance, BAE Systems Applied Intelligence.
Five years into FATCA and the transition is far from over. Says Atkinson, "FATCA requirements for financial institutions go into effect over a multi-year period, and there are still additional requirements and obligations with effective dates coming up over the next few years. We haven’t yet seen the full implementation of all of the FATCA requirements."
Edit 4/6/15: Addition made to McKeegan's quote as requested.