Definition of Fatca

On 17 January 2013, the US issued final regulations regarding new anti-tax avoidance measures called the Foreign Account Tax Compliance Act (Fatca).

The new rules will force all global financial companies to report details of US account holders with more than $50,000 to the Internal Revenue Service (IRS), the US tax authority.

US tax authorities expect the measures to raise around $7.6bn in revenue for the IRS over a 10-year period.

Foreign firms with US investors as clients will be impacted by the new rules. The deadline for foreign firms to enter into an agreement with the IRS is 25 October 2013 in order to be included on the IRS’s list of compliant institutions in December 2013.

Several jurisdictions have already brokered deals, or intergovernmental agreements, with the US Treasury which are designed to ease the burden of compliance for firms operating in those countries.

There are two models for these agreements.  One involves firms reporting directly to the IRS on their clients, while the other allows firms to report to their domestic tax bodies who pass on information to the IRS.

The UK, Ireland, Denmark, Mexico have signed intergovernmental agreements with the US, while Spain and Switzerland have “initialled” but not released details.

France, Germany, Italy, Japan, Canada, Finland, Guernsey, the Isle of Man, Jersey, the Netherlands and Norway are expected to conclude talks with US tax authorities shortly. [1]

In September 2012 the UK signed an agreement with the US to implement the reporting required under US FATCA (Foreign Account Tax Compliance Act) legislation, which requires automatic exchange of bank and other financial account information on US citizens and entities. Similar agreements have since been entered into between other states and a model set of agreements has been developed to facilitate this sharing, in the form of the common reporting standard (CRS). [2]

Fatca historical background

The Fatca rules, quietly passed by Congress in 2012, would partly put the responsibility on the bank or asset manager – not just the individual – to make this filing.

This legislation aims to tackle offshore tax evasion.

The IRS insists that these measures are simple for banks and asset managers to implement; they just need to perform an electronic “sweep” of their clients to track those with more than $50,000 in an account and obvious connections with the US, such as an address, Treasury officials argue.

The new rules leave some financial officials fuming in places such as Australia, Canada, Germany, Hong Kong and Singapore. Little wonder. Never mind the fact that implementing these measures is likely to be costly; in jurisdictions such as Singapore or Hong Kong, the IRS rules appear to contravene local privacy laws.

What has left some financiers doubly angry is that Congress introduced the law with little overseas consultation – but the IRS is now threatening heavy penalties for non-compliance.

More specifically, the IRS is threatening to impose a withholding tax of up to 30 per cent on sales of US assets by groups that it deems to be “non-compliant” – and the assets could include US shares or US Treasury bonds.

Hence the fact that some non-US asset managers and banking groups are debating whether they could simply ignore Fatca by creating subsidiaries that never touch US assets at all. [3]


Fatca in the news

At the end of 2012 it was revealed that a draft agreement drawn up by the UK Treasury would require automatic disclosure of information revealing full details of all account holders in the Channel Islands and the Isle of Man. Although it would shatter secrecy at least one observer thought the offshore jurisdictions would be forced to sign up or no bank with a US presence would be able to do business there.

During 2012, investment industry groups were lobbying for extra time to comply and warning of the huge extra costs that would be involved.


US demands tax tolerance of foreign financial groups

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