The Foreign Account Tax Compliance Act (FATCA) requires foreign banks to forward details of US clients with deposits of over $50,000 to the IRS or withhold 30% of the interest, dividend and investment returns payable to them and send the money to the IRS instead. Foreign financial institutions that do not comply with FATCA will be billed for the taxes due, and the rate is a hefty 40% of the amount in question plus be subject to greater scrutiny by the IRS.Yes, you heard that correctly, in an attempt to stop tax evasion by Americans who hide assets in offshore bank accounts we are now going to try to impose our regulations on financial institutions in other countries. This should be interesting.
FATCA was introduced after the UBS debacle in 2009 where Swiss bank UBS was fined a penalty of $780 million for abetting US taxpayers in hiding their taxable money in UBS accounts. The bank also had to disclose information on more than 4,000 US clients suspected of tax evasion to the IRS. After its draft and proposal in 2009, it was signed into law by President Obama in March 2010. FATCA will go into effect on January 1, 2014 for most types of transactions and subsequently for other payments a year after that.
Originally, the bill was to have gone into effect in 2013 but was postponed by a year due to widespread criticism from foreign banks about FATCA’s reach, costs and gray areas. We think that it will continue to be delayed as other countries continue to push back.
FATCA affects a wide range of financial institutions that include banks of all kinds (commercial, private and investment), trusts, broker-dealers, insurance companies, funds of all sorts (mutual, hedge and private-equity), domiciliary companies, LLCs, partnerships and other intermediaries and withholding agents including the affiliates of these entities.
We will keep you posted as this drama unfolds. In the meantime, if you have any questions rega