Foreign Account Tax Compliance Act
|Enacted by the||111th United States Congress|
|Effective||March 18, 2010 (26 USC §6038D); December 31, 2012 (26 USC §§1471-1474)|
|Stat.||124 Stat. 97-117|
|U.S.C. sections created||26 USC §§ 1471-1474, 26 USC § 6038D|
|U.S.C. section(s) amended||26 USC §§ 163, 643, 679, 871, 1291, 1298, 4701, 6011, 6501, 6662, 6677|
The Foreign Account Tax Compliance Act (FATCA) is a portion of the 2010 Hiring Incentives to Restore Employment (HIRE) Act that requires individuals to report their financial accounts held overseas and foreign financial institutions to report to the Internal Revenue Service (IRS) about their American clients. FATCA was designed primarily to combat offshore tax evasion and recoup federal tax revenues.
Under U.S. tax law, U.S. persons are generally required to report and pay taxes on income from all sources. Taxpayer identification numbers and source withholding are used to enforce tax compliance. For example, mandatory withholding is often required when a U.S. payor cannot confirm the U.S. status of a foreign payee. The IRS previously instituted a Qualified Intermediary (QI) program under IRC §1441 which required participating foreign financial institutions to maintain records of the U.S. or foreign status of its account holders and to report income and withhold taxes. One report found that participation in the QI program was too low to have a substantive impact as an enforcement measure and was prone to abuse. An illustration of the weakness in the QI program was that UBS, a Swiss bank, had registered as a QI with the IRS in 2001 and was later forced to settle with the U.S. Government for $780 million in 2009 over claims that it fraudulently concealed information on its American account holders. Self-reporting of foreign financial assets was also found to be relatively ineffective.
It has been estimated that the U.S. Treasury loses as much as $100 billion annually to offshore tax non-compliance. Therefore, supplementing the reporting regimes already in place was deemed to be the most effective means of increasing compliance and raising government revenue. After committee deliberation, Sen. Max Baucus and Rep. Charles Rangel introduced the Foreign Account Tax Compliance Act of 2009 to Congress on October 27, 2009. It was later added to an appropriations bill as an amendment, sponsored by Sen. Harry Reid, which also renamed the bill the HIRE Act. The bill was signed into law on March 18, 2010.
FATCA has three main provisions:
- It requires foreign financial institutions, such as banks, to enter into an agreement with the IRS to identify their U.S. account holders and to disclose the account holders' names, TINs, addresses, and the accounts' balances, receipts, and withdrawals. U.S. payors making payments to non-compliant foreign financial institutions are required to withhold 30% of the gross payments. Foreign financial institutions which are themselves the beneficial owners of such payments are not permitted a credit or refund on withheld taxes absent a treaty override.
- U.S. persons owning these foreign accounts or other specified financial assets must report them on a new Form 8938 which is filed with the person's U.S. tax returns if they are generally worth more than US$50,000; a higher reporting threshold applies to overseas residents and others. Account holders would be subject to a 40% penalty on understatements of income in an undisclosed foreign financial asset. Understatements of greater than 25% of gross income are subject to an extended statute of limitations period of 6 years.
- It closes a tax loophole that foreign investors had used to avoid paying taxes on U.S. dividends by converting them into "dividend equivalents" through the use of swap contracts.
These reporting requirements are in addition to reporting of foreign financial accounts to the U.S. Treasury; this most notably includes Form TD F 90-22.1 "Report of Foreign Bank and Financial Accounts" (FBAR) for foreign financial accounts exceeding US$10,000 required under Bank Secrecy Act regulations issued by the Financial Crimes Enforcement Network (FinCEN).
||The neutrality of this section is disputed. (January 2013)|
FATCA has raised fears of imposition of capital controls and assertions that capital flight is underway as a result. There have also been privacy concerns, in particular for those with dual citizenship, who may renounce to their U.S. passport. Many have also expressed doubts as to the implementability of this legislation. As a result of FATCA, European and Australian banks such as Deutsche Bank, Commerzbank, HSBC, ING Group and Credit Suisse have been closing brokerage accounts for all US customers since early 2011, citing "onerous" US regulations, which FATCA will make more complex when it goes into effect in 2013. However, in late 2011 the IRS stated that FATCA would be made simpler for many expatriates.
In 2011 American Citizens Abroad (ACA), a Geneva-based organization representing the interests of six million Americans residing outside the U.S., launched a campaign to repeal FATCA. The ACA claimed that "FATCA legislation is predicated on the faulty assumption that foreigners throughout the world with no predisposition to favor the U.S. will react positively to its attempts to convert them into unpaid IRS agents." When finalized in January 2013, FATCA provisions included incentives for foreign financial institutions, especially so-called local banks, to avoid discriminating against Americans.
The Association of Certified Financial Crime Specialists (ACFCS) claims FATCA is expected to raise revenues of approximately US$800 million per year for the US Treasury; however, the costs of implementation are more difficult to estimate, and estimates between hundreds of millions and over US$10 billion have been published. ACFCS also claims it is extremely likely that the cost of implementing FATCA (which will be borne by the foreign financial institutions) will far outweigh the revenues raised by the US Treasury, even excluding the additional costs to the US Internal Revenue Service for the staffing and resources needed to process the data produced.
Canada's Finance Minister Jim Flaherty has raised an issue with this "far reaching and extraterritorial implications" which would require Canadian banks to become extensions of the IRS and would jeopardize Canadians' privacy rights.
A petition against Governor of the Bank of Israel, Stanley Fischer, filed in October 2012 with the High Court of Justice, alleged that Fischer's failure to stop Israeli banks from acting on FATCA against Israeli customers, amounted to "replacement of his loyalty to the State of Israel and its laws, with loyalty to another nation and its laws and/or financial institutions and their interests."
There are wildly varying estimates of the likely cost of implementing the legislation. FATCA is expected to produce approximately $8.7 billion in additional tax revenue over 10 years, which is small relative to the estimated $40 billion per year cost of international tax evasion.:36 The United States Congress Joint Committee on Taxation estimated that the FATCA bill would raise $792 million of additional taxes a year in the next ten years.
Estimate of the costs to the private sector, the IRS and foreign revenue authorities are less precise. Compliance cost to financial institutions alone has been roughly estimated at US$8 billion a year, approximately ten times the amount of estimated revenue raised. The United Kingdom government has estimated that the cost to British businesses alone will be £1.1 billion - £2 billion for the first five years (approximately two thirds of the estimate total additional global tax revenue expected). There are few reliable estimates for the additional cost burden to the IRS, although it seems certain that the majority of the cost seems likely to fall on the relevant financial institutions and (to a lesser degree) foreign tax authorites who have signed intergovernmental agreements.
FATCA added Internal Revenue Code § 6038D (26 U.S.C. § 6038D) which requires the reporting of any interest in assets over $50,000 after 18 March 2010, and § 1298(f) (26 U.S.C. § 1298(f)) requiring shareholders of a passive foreign investment company (PFIC) to report certain information. It also added §§ 1471–1474 (26 U.S.C. § 1471 et seq.) requiring U.S. payors to withhold taxes on payments to foreign financial institutions (FFI) and nonfinancial foreign entities (NFFE) that have not agreed to provide the IRS with information on U.S. accounts.
The IRS issued temporary regulations (TD 9567) on 14 December 2011 requiring the filing of Form 8938 with individual income tax returns, and proposed regulations (REG-130302-10) for domestic entities. Treasury and the IRS issued proposed regulations (REG-121647-10) regarding information reporting by foreign financial institutions on 8 February 2012, and issued final regulations and guidance (TD 9584) on reporting interest paid to nonresident aliens on 17 April 2012. The IRS issued final regulations (TD 9610) regarding information reporting by foreign financial institutions on 28 January 2013.
FATCA implementation faces legal hurdles because it may be illegal in foreign jurisdictions for financial institutions to disclose the required account information. There is a controversy about the appropriatenesss of intergovernmental agreements (IGAs) to solve any of these problems.
France, Germany, Italy, Spain, and the United Kingdom have consented to cooperate with the U.S. on FATCA implementation, as have Switzerland, Japan  and South Africa. The deputy director general of legal affairs of the People's Bank of China, the central bank of the People's Republic of China, Liu Xiangmin said "China's banking and tax laws and regulations do not allow Chinese financial institutions to comply with FATCA directly."
FATCA intergovernmental agreements
As of 7 June 2013, the following countries have concluded intergovernmental agreements with the United States:
The United States Department of Treasury has published model IGAs which follow two approaches. Under Model 1, financial institutions in the partner country report information about U.S. accounts to the tax authority of the partner country. That tax authority then provides the information to the United States. Model 1 comes in a reciprocal version (Model 1A), under which the United States will also share information about the partner country's taxpayers with the partner country, and a nonreciprocal version (Model 1B). Under Model 2, partner country financial institutions report directly the the U.S. Internal Revenue Service, and the partner country agrees to lower any legal barriers to that reporting. Model 2 is available in two versions: 2A with no Tax Information Exchange Agreement (TIEA) or Double Tax Convention (DTC) required, and 2B for countries with a pre-existing TIEA or DTC. Hence an IGA can be concluded without either a TIEA or DTC in place, as a tax professor has corrected an assertion by Rand Paul.
All of the IGAs so far have been reciprocal Model 1 agreements, with the exception of Switzerland's, which is a Model 2 agreement. The IGA with Mexico is the only one that has entered into force.
- "The Foreign Account Tax Compliance Act (FATCA)". DLA Piper.
- 111 Cong. Rec. S1635-36 (daily ed. Mar. 17, 2010) (statement of Sen. Levin) ("Right now, thousands of U.S. tax dodgers conceal billions of dollars in assets within secrecy-shrouded foreign banks, dodging taxes and penalizing those of us who pay the taxes we owe. The Permanent Subcommittee on Investigations... estimated that these tax-dodging schemes cost the Federal Treasury $100 billion a year.") [hereinafter "Levin statement"], http://www.gpo.gov/fdsys/pkg/CREC-2010-03-17/pdf/CREC-2010-03-17-pt1-PgS1633-8.pdf#page=4
- e.g., 26 U.S.C. §§61, 6012
- e.g., 26 U.S.C. §1441
- U.S. Government Accountability Office (GAO), Offshore Financial Activity Creates Enforcement Issues for IRS: Testimony Before the Committee on Finance, U.S. Senate, March 17, 2009 (statement of Michael Brostek, Director, Strategic Issues Team) at 10, [hereinafter "GAO Report"], http://www.finance.senate.gov/imo/media/doc/031709mbtest1.pdf
- GAO Report at 10-11
- GAO Report at 5 (referring to the FBAR filing requirement)
- Levin statement, supra
- 111 Cong. Rec. S10,778 (statement of Sen. Max Baucus) ("This bill [S. 1934] would improve tax compliance without raising taxes on anyone. These are taxes that are already legally owed.")
- 111 Cong., S.A. 3310
- 26 U.S.C. §1471(c)(1)
- 26 U.S.C. §1471
- Bell, Kay (23 March 2010). "Jobs bill includes tax changes". MSNBC.
- Smith, Lisa. "FATCA – Foreign Account Tax Compliance Act". iExpats.com. Retrieved 13 September 2012.
- 26 U.S.C. §1474(b)(2)
- 26 U.S.C. §6038D(a)
- e.g., 26 C.F.R. §1.6038D-2T(a)
- Internal Revenue Service (25 January 2012). "Do I need to file Form 8938, 'Statement of Specified Foreign Financial Assets'?".
- 26 U.S.C. §6662(j)(3)
- 26 U.S.C. §6501(e)(1); the limitations period was presumably extended because it was determined that international audit cases can take an additional 500 days to fully investigate. GAO Report at 1.
- 26 U.S.C. §871(m); dividends such as those paid by a U.S. corporation are U.S. source and therefore subject to the 30% withholding tax for foreign payees. 26 U.S.C. §§871(1)(A), 861(a)(2). The loophole was based on reclassifying the payment as income derived from the residence of the foreign payee and therefore exempting the payment from U.S. taxation.
- Morgenson, Gretchen (26 March 2010). "Death of a Loophole, and Swiss Banks Will Mourn". The New York Times.
- Jolly, David; Knowlton, Brian (26 December 2011). "Law to Find Tax Evaders Denounced". The New York Times.
- 31 C.F.R. 1010 (76 F.R. 10234 of 24 February 2011).
- Rahn, Richard W. (7 November 2011). "Joining the chorus for tax cooperation". The Washington Times.
- Dunn, Peter W. (28 November 2011). "FATCA: A Ticking Time Bomb for the Economy". American Thinker.
- "Scratched by the FATCA". The Economist. 26 November 2011. Retrieved 2012-07-16. "Another approach would involve some global funds avoiding American assets entirely. That can hardly be what Congress had in mind."
- "Canadian Finance Minister Flaherty criticizes U.S. crackdown on tax evasion". CBC News. 20 September 2011.
- "Expats Call For FATCA Repeal". Forbes. 6 September 2011.
- "American tax law: Scratched by the FATCA: Congress creates a bureaucratic nightmare for fund managers". The Economist. 26 November 2011.
- "European Banks Stop Serving American Customers". Der Spiegel. 14 December 2011.
- "German banks abandon US customers". The Local. 15 December 2011.
- Wood, Robert W. (16 December 2012). "IRS Exempts Many Expats From FATCA". Forbes. Retrieved 13 September 2012.
- "Why FATCA is Bad for America and Why it Should be Repealed Now!". American Citizens Abroad. 2011-12-20.
- "[Inter-Governmental Agreements]IGA FATCA Agreements Contain Language Suggested by ACA". American Citizens Abroad. 2013-01-20.
- "FATCA may identify tax cheats, but its dragnet for financial criminals may produce an even bigger yield". Association of Certified Financial Crime Specialists. Retrieved 2012-05-011.
- Hinchberger, Bill (27 September 2012). "European banks shut Americans out over U.S. tax rules". USA Today.
- "Joseph Zernik v Stanley Fischer (7650/12) Petition in the High Court of Justice of the State of Israel". 23 October 2012.
- "Mister Taxman: Why Some Americans Working Abroad Are Ditching Their Citizenships". TIME. 2013-01-31.
- Gravelle JG. (2013). Tax Havens: International Tax Avoidance and Evasion. CRS.
- Joint Committee on Taxation, JCS-6-10, Estimated Revenue Effects of the Revenue Provisions Contained in an Amendment to the Senate Amendment to the House Amendment to the Senate Amendment to H.R. 2847, the Hiring Incentives to Restore Employment Act. Referenced: "Why FATCA is Bad for America and Why it Should be Repealed". American Citizens Abroad.
- "FATCA Carries Fat Price Tag". Forbes. 2011-11-30.
- "The cost of complying with FATCA". Lexology. 2013-06-03.
- Internal Revenue Bulletin 2013-15, 8 April 2013.
- 26 C.F.R. 1.6038D-1T through -8T excluding -5T (76 F.R. 78553 of 19 December 2011)
- 26 C.F.R. 1.6038D-5T (76 F.R. 78594 of 19 December 2011)
- Internal Revenue Service (8 February 2012). "Treasury, IRS Issue Proposed Regulations for FATCA Implementation".
- 77 F.R. 9022 of 15 February 2012
- 77 F.R. 23391 of 19 April 2012
- 78 F.R. 5874 of 28 January 2013
- "Key Aspects of the FATCA Regime". Shearman & Sterling LLP. 15 May 2012.
- Christians, Allison (11 February 2013). "The Dubious Legal Pedigree of IGAs (and Why it Matters)". Tax Notes International (Tax Analysts) 69 (6): 565. SSRN 2280508.
- U.S. Treasury Department (8 February 2012). "JOINT STATEMENT FROM THE UNITED STATES, FRANCE, GERMANY, ITALY, SPAIN AND THE UNITED KINGDOM REGARDING AN INTERGOVERNMENTAL APPROACH TO IMPROVING INTERNATIONAL TAX COMPLIANCE AND IMPLEMENTING FATCA".
- Coder, Jeremiah (28 June 2012). "News Analysis: U.K. Hoping U.S. Will Make FATCA Easier to Swallow". Tax Notes Today.
- Cohn, Michael (21 June 2012). "U.S. Strikes FATCA Deals with Switzerland and Japan". Accounting Today.
- Flaherty, Michael (28 November 2012). King, Larry, ed. "China central bank official slams U.S. tax dodging law". Hong Kong: Reuters.
- "U.S. Treasury FATCA Resource Center". U.S. Treasury Department. Retrieved 18 June 2013.
- Christians, Allison (5 May 2013). "Correcting the record 5 ways on the stories about Sen. Paul blocking "FATCA Treaties"".
- U.S.-Mexico IGA, Article 10(1).
- FATCA Information from the US Internal Revenue Service
- FSI Tax Posts
- U.S. Treasury FATCA Resource Center
- FATCA timeline from the Thomson Reuters FATCA site
- Poptcheva, Eva-Maria (2013). A FATCA for the EU? Data protection aspects of automatic exchange of bank information. Library of the European Parliament. p. 6.