The Foreign Account Tax Compliance Act (FATCA), a new law coming into force on July 1 that seeks to find out where U.S. taxpayers hold offshore bank accounts, has stirred controversy and opposition.
Under FATCA, foreign banks will have to look for clients with U.S. connections and then share the information with the Internal Revenue Service.
The intention is to round up tax cheats, but critics believe the law will be expensive for banks implement, a cost they will pass onto account holders. Some also say the new law creates discincentives for wealthy individuals to live in the United States and increase the threat of identity theft.
Nineteen jurisdictions have signed FATCA agreements and 11 more are close to signing.
Financial institutions worldwide must register on the IRS’s FATCA web portal by April 25 to be included on its Foreign Financial Institution (FFI) list by its publication on June 2. Financial firms not on the FFI list as of that date could face the risk that FATCA-compliant firms and registered FFIs will stop doing business with them.
Several jurisdictions that have been known to serve as tax havens for corporations have signed on to FATCA. Bermuda, Malta, Switzerland, the Netherlands and the three UK Crown Dependencies (Guernsey, Isle of Man and Jersey) have signed intergovernmental agreements (IGAs), most of them just last month.
Critics contend that it is likely the cost of implementing FATCA — which will be borne by the foreign financial institutions — will far outweigh the revenues raised by the U.S. Treasury. Others wonder if it will cause some financial institutions to divest of their U.S. holdings.
Time magazine has reported a sevenfold increase in wealthy Americans renouncing U.S. citizenship between 2008 and 2011, and the surge has been attributed in part to FATCA.
The group American Citizens Abroad has also expressed concern about identity theft, which it believe comes with the special identification of U.S. citizens in these foreign institutions.
The United States Congress Joint Committee on Taxation estimates that FATCA could raise $792 million of additional taxes a year in the next 10 years and make at least a small dent in the billions lost to international tax evasion.
Countries that have signed IGAs to comply with FATCA are:
- Isle of Man
- Cayman Islands
- Costa Rica
- United Kingdom
Julie DiMauro is the executive editor of FCPA Blog and can be reached here.