Law That May Reduce Tax Evasion Goes Into Effect On July 1
The Foreign Account Tax Compliance Act (FATCA) became law in the United States in 2010, but the clock is still ticking on its implementation.
The clock will stop ticking on July 1, 2014.
The U.S. Congress and the Obama Administration pressed for FATCA in 2010 because they wanted to reduce the amount of tax evasion by Americans who had financial accounts outside the USA. The law requires Americans with more than $50,000 in foreign financial accounts to report their assets to the Internal Revenue Service (IRS) via Form 8938 and requires foreign financial institutions (FFIs) to report their American accountholders to the IRS.
FATCA penalizes Americans and FFIs, such as banks that don’t comply with the law. Americans who don’t disclose their offshore accounts are subject to a penalty equal to 40 percent of their tax bill on their foreign assets while the foreign banks that don’t disclose their American account holders are subject to a 30 percent withholding tax on the Americans’ income.
The Congressional Joint Committee on Taxation projected that the U.S. government will collect about $8.7 billion during the first 10 years that the FATCA law is in effect, reported Executive magazine.
Americans with money abroad must comply with the law when they submit their tax returns each year, but the deadline for the FFIs has been delayed a few times during the past two years. The deadline is now July 1, 2014. In recent weeks, the number of nations that have signed intergovernmental agreements with the USA to furnish the FFIs information on their American account holders has increased dramatically.
“In practice, the U.S. has allowed foreign governments to serve as conduits for the information in many cases,“ The Wall Street Journal reported in an April 2, 2014 article entitled “More Countries Agree to Help U.S. Crack Down on Tax Dodgers.” “Without an intergovernmental agreement of some kind, foreign financial institutions face potentially stiff penalties in their dealings with U.S. financial institutions.”
In the past few weeks, several business publications have had reports about individual nations signing intergovernmental agreements with the USA. The news about these agreements is coming so fast that several business publications are reporting different figures. The Wall Street Journal reports that the number is 45 with 19 nations having signed pacts in recent weeks — Australia, Austria, Belgium, Brazil, British Virgin Islands, Czech Republic, Gibraltar, Jamaica, Kosovo, Latvia, Liechtenstein, Lithuania, Poland, Portugal, Qatar, Romania, Slovenia, South Africa and South Korea.
A blog called The Tax Times lists 51 nations that have signed or are in the process of signing these pacts with the USA. The list includes most of the world’s major economic powers as well as tax havens such as the Cayman Islands and Switzerland but China and Russia have not signed agreements.
The July 1 deadline is “striking fear into the hearts of foreign institutions everywhere” because the financial firms are confused about the law, reports Forbes magazine in an April 22, 2014, article entitled “Offshore Accounts Can Mean Jail, And Not Just In U.S.”
The issue is a particular concern in the Middle East and North Africa because those nations will not be ready by the July 1 deadline, reports Executive magazine.
It’s also unclear whether FATCA will be a long-term law. Republicans by and large voted against the law in 2010 and the Republican National Committee on Jan. 24, 2014, called for the law to be repealed. The Republicans’ objections include the cost of complying with the law. KPMG, the highly-respected accounting and consulting firm, reported that FATCA could cost financial institutions billions of dollars.
In addition, FATCA opponents are blaming the record amount of Americans who renounced their citizenship in 2013 — almost 3,000 — on the law, according to the April 30, 2014, article “FATCA Blamed As US Expatriations Hits New Record.”