FATCA And US Expats: The Great Unbanked

Expat Briefing Editorial Team, 06 May, 2016

Americans abroad have long had to suffer perhaps the worst tax regime in the world for expats, with the United States continuing to tax on the basis of citizenship, rather than residence. But to add insult to injury, they are now finding it increasing hard to get access to banking services thanks to yet another US tax compliance law: FATCA. Thankfully, as we see in this Expat Briefing special feature on the impact of FATCA, at least some help is now available to US expats.

What is FATCA?

FATCA, the abbreviated form of the United States Foreign Account Tax Compliance Act, is a little-known law (if you're not a US expat, that is), that was tacked onto President Obama's 2010 stimulus legislation, the HIRE Act, as a revenue raiser. The purpose of the law is to tackle the non-disclosure by US citizens of taxable income and assets held in foreign accounts.

FATCA is designed to ensure that the US obtains information on accounts held abroad at foreign financial institutions (FFIs) by US persons. You might be asking at this point how the law of one country can force a company or individual in another sovereign state to hand over such sensitive financial information. It was a question many people were asking when the law was signed! However, the United States Treasury Department has got around the issue of FATCA's long extraterritorial reach by convincing other countries to sign inter-governmental agreements (IGAs), which permit FFIs to send the required information to the US Internal Revenue Service (IRS). For the most part, this is done via the tax authority of jurisdiction where the FFI is located. Because the majority of IGAs are reciprocal i.e. US FFIs are obliged to supply details of foreigners' financial accounts to the IRS, and ultimately to their country of residence, scores of countries have been tempted to sign the agreements. Indeed, by the end of April, well over 100 IGAs had been agreed with the US Treasury.

FATCA adds yet another reporting burden on those with interests in foreign accounts, in addition to the existing FBAR (Report of Foreign Bank Account) obligations. So US citizens, US individual residents, and what the IRS describes as "a very limited number of non-resident individuals" who own certain foreign financial accounts or other offshore assets (specified foreign financial assets) must report those assets on new Form 8938 "Statement of Specified Foreign Financial Assets," which must be attached to the annual US income tax return (Form 1040).

A more detailed explanation of FATCA can be viewed in a previous Expat Briefing feature, but, in summary, failure by an FFI to disclose information on their US clients, including account ownership, balances and amounts moving in and out of the accounts, will result in a requirement on US financial institutions to withhold 30 percent tax on US-source income. Penalties also exist for individuals failing to meet their reporting obligations under FATCA.

FATCA's Impact On Expats

Unsurprisingly, studies suggest that FATCA has had an overwhelmingly negative impact on the lives of US expats. Obviously, the additional tax compliance burden is one of the main reasons why FATCA is so unpopular. But a major complaint is that the US authorities largely ignored the US expat community when they railroaded FATCA through.

The results of one recent survey, released in February 2016 by the Americans Abroad Global Foundation (ACAGF) suggest that most Americans overseas feel FATCA negatively impacts their professional pursuits and that compliance is over burdensome. And according to the ACAGF, which conducted the study in conjunction with the University of Nevada, Reno, the majority of respondents' perception was consistent with the sentiment that the US Government is not concerned about the impact of FATCA on its citizens living abroad.

The survey canvassed the views of 684 US expats across a wide field of age groups in 60 countries between June 16 and August 15, 2015. It found that 78 percent of the respondents felt FATCA compliance puts them at a professional disadvantage compared to others working in their country of residence.

The US Expat Banking Lock-Out

One of the most serious repercussions of FATCA on the day-to-day lives of US expats is the reluctance of banks to have anything to do with American clients. Why? Because by closing US clients' existing accounts, and refusing to open new ones for them, the financial institutions in question can reduce their exposure to what many consider to be a significant regulatory risk. In other words, they don't have to deal with the additional administrative burden, and can avoid the possibility of sanctions and embarrassment for misunderstanding these complex rules.

Of course, this is of no help to the many US expats who are now finding it increasingly difficult to get access to even the most basic financial services. While there are no firm estimates for how many Americans living abroad have suffered from the banking lock-out, the expat pressure group American Citizens Abroad (ACA) thinks it is in the thousands, although a recent survey of expats conducted by Democrats Abroad suggests that as many as one-in-six respondents have had their bank accounts shut (and there are almost 8m Americans living abroad). Whatever the real figures is, it is clear that this issue is becoming a huge problem for US expats. Indeed, the vast majority (86 percent) of those polled by ACAGF and the University of Nevada in Reno, said that FATCA needed to be amended to allow Americans overseas access to banking services.

Sonja Pippin, associate professor in accounting at the University, observed of the results: "The consensus from this sample of Americans abroad feels that the US Government does not recognize how the FATCA legislation is negatively impacting them, limiting their ability to maintain legitimate banking and financial relationships and, that in many respects, simply does not care how the legislation is affecting a community of law-abiding citizens who have chosen to live overseas for work or personal reasons."

The State Department Credit Union – An Expat Banking Lifeline?

There has been some good news on the banking front for US expats recently. And it came in the form of an announcement by ACA in February 2016 that it had teamed up with the State Department Federal Credit Union (SDFCU) in order to extend banking services to potentially thousands of Americans living overseas who currently are unable to or face difficulties opening US bank accounts.

The ACA/SDFCU Account, developed by ACA in cooperation with the SDFCU, provides the same type of account used by many Americans working at US embassies to other Americans living anywhere in the world, without needing to have a US address or being affiliated with a government agency.

"As an organization, we identified a pressing need in the overseas community and have worked with our friends at the State Department Federal Credit Union to arrive at a win-win solution," said ACA Executive Director Marylouise Serrato.

As the ACA pointed out in its press release, "Americans living abroad often require a US bank account to pay bills for an elderly parent in the US, pay school fees for a child in school in the US, make tax payments, and conduct dozens of other normal, everyday banking transactions." What's more, a US account makes it easier to maintain an IRA or other deferred compensation arrangement, and simplifies investing in many types of mutual funds.

According to the ACA, these bank accounts are being made available to all its members living overseas. They provide access to e-banking access, financial planning services, IRAs, Share Certificates, and many other types of financial services.

The "Same-Country Exception" – The Long Term Solution To The Lock-Out?

While the ACA/SDFCU Account may turn out to be invaluable to many US expats struggling to access banking services, the ACA argues that a more sustainable solution would be to amend FATCA by inserting a "same-country exception" in the FATCA regulations. This has also been recommended by the US National Taxpayer Advocate, Nina E. Olson, who identified the inadequacy of IRS taxpayer services for Americans living abroad as one of the "most serious problems" with the tax system in her latest annual report to Congress.

Under a same-country exception rule, where a US person truly resides in a foreign country and has a normal financial account at a bank or similar institution in the same country, the FFI would treat it as if it belonged to someone who is not a US taxpayer, and the latter would not have to list the account when returning Form 8938, Statement of Specified Foreign Financial Assets.

Commenting on the problem in 2015, Serrato said: "If the account in question is a garden-variety bank account and it sits in a bank down the street in the same country, it's realistic to assume that this account is used for normal, everyday purposes: to buy groceries, to pay the rent, to pay for vacation travel, and so forth. This type of account should not be affected by FATCA. With this exemption, foreign bankers could relax a bit when dealing with their American customers. And Americans living outside the US would not need to feel that they are being unfairly targeted."

FATCA – Here To Stay?

Of course, US expats wouldn't be experiencing these sorts of problems if FATCA wasn't on the statute book in the first place. Which is why groups opposed to the law back in the US, including some prominent members of Congress, are determined that it should be rescinded. One of them is Senator Rand Paul, one of the outside contenders for the Republican presidential nomination for 2016, who introduced legislation in the Senate in March 2015 to repeal certain provisions of FATCA.

One of the major bones of contention with FATCA is that it will collect relatively small amounts of revenue for the US Treasury – less than USD1bn per year by the Treasury's own estimation – compared with the billions that have already been spent by FFIs and tax authorities preparing for and administering the law. Thus, Paul's bill is designed to "put an end to a defective bill that does not accomplish its objective of ending tax evasion."

Paul also argues that FATCA is unconstitutional, represents a gross invasion of the privacy of American citizens by the Government and is likely to deter investment in the US economy. What's more, FATCA opponents argue that the Treasury did not have the authority to conclude IGAs without the consent of Congress in the first place. Indeed, the original FATCA legislation does not envisage the conclusion of new international treaties to implement the law.

However, while Paul's position may be based on sound arguments, repealing FATCA is simply not a priority from Congress at the moment, even though it might have widespread support in the Republican Party, which currently has a congressional majority. The fact that a similar bill introduced by Paul in the previous session of Congress failed to get voted on doesn't bode well for his latest effort.

Undeterred by the lack of legislative progress, Paul is also trying to nullify FATCA via the court system. However, after the US District Court for the Southern District of Ohio dismissed a case brought by the Kentucky Senator and a group of individuals in April 2016, the possibility that FATCA will be expunged from the US tax code is fading.

Doubtless the plaintiffs will already be considering their grounds for an appeal to a higher court. But unfortunately, for the foreseeable future at least, US expats – the overwhelming majority of whom are likely to be fully tax compliant – are just going to have to live with the unfortunate consequences of FATCA.

Tags: accounting | agreements | compliance | Banking | Tax | Expats | FATCA | Compliance | individuals | United States | regulation | legislation | court | law | offshore | tax authority | services | banking | financial services | tax compliance | tax |


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