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FATCA: No Respite For US Expats - Yet

Expat Briefing Editorial Team
08 May, 2015


Following another call from US expat pressure group Americans Citizens Abroad (ACA) that the United States Treasury amend tax regulations to exempt Americans residing in a foreign country from the Foreign Account Tax Compliance Act (FATCA), this feature provides an overview of this controversial tax reporting law and recent FATCA developments.


What Is FATCA?

Signed by President Obama in March 2010 as a revenue provision to the Hiring Incentives to Restore Employment Act, FATCA is designed to tackle the non-disclosure by US citizens of taxable income and assets held in foreign accounts. Therefore, FATCA is intended to ensure that the US obtains information on accounts held abroad at foreign financial institutions (FFIs) by US persons. 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.

To address situations where foreign law would prevent an FFI from complying with the terms of an FFI agreement, the United States Treasury Department has developed three model intergovernmental agreements (IGAs). Under a Model 1 IGA, FFIs report the necessary information to their home tax authority, which then transmits it on to the US Internal Revenue Service (IRS). A Model 1A IGA requires the IRS to reciprocate with similar information about account holders from the signatory country with the partner government. The Model 2 IGA requires FFIs to report specified information about their US accounts directly to the IRS.

As of April 29, 2015, 52 jurisdictions had signed a Model 1 IGA with the US Treasury Department. A further seven countries have signed Model 2 agreements. In addition, 36 countries have reached agreements in substance with the US on a Model 1 IGA, and six have agreements in substance on a Model 2 IGA.

In practical terms, 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).


FATCA: All System Go

To get the FATCA reporting system up and running has taken a great deal of work, both on the part of the IRS and FFIs. A recent survey by the Securities Industry and Financial Markets Association and Mindtree found that financial firms spent over USD1bn in an effort to comply with FATCA in 2013 and 2014 alone. This is considered to be only a small fraction of the global compliance costs of FATCA, as the IRS has estimated that there could be as many as 600,000 FFIs required to comply with FATCA, and the vast majority of these banks are not included in this cost estimate.

Despite its thinning resources, the IRS hasn't been deterred from the onerous task of administering FATCA, and some key milestones have been achieved in the last couple of years.

Final regulations for FATCA were originally published in January 2013. Since those regulations were issued, Treasury and the IRS have extended the start of withholding and account due diligence requirements by six months to July 1, 2014, opened the FATCA portal for FFIs in August 2013, issued a final FFI Agreement for financial institutions in January 2014, and received numerous comments with respect to the regulations during discussions with stakeholders worldwide.

In February 2014, the Treasury and the IRS released what they called "the last substantial package of regulations necessary to implement the Foreign Account Tax Compliance Act." The package of proposed and temporary regulations makes additions and clarifications to the previously-issued FATCA regulations, and also provides guidance to coordinate FATCA rules with preexisting due diligence, reporting, and withholding requirements under other provisions of the US tax code. In fact, the new regulations contain over fifty amendments and clarifications to the FATCA regulations issued in January 2013, "regarding ways to further reduce burdens consistent with the compliance objectives of the statute."

In January 2015, the IRS commenced enrollment for its International Data Exchange Service (IDES), the platform which will enable the secure transmission of client data under FATCA. FFIs and host country tax authorities (HCTAs) will use IDES to securely send their information reports on financial accounts held by US persons to the IRS under FATCA, pursuant to the terms of an IGA. More than 145,000 financial institutions have registered through the IRS FATCA Registration System.

"The opening of the IDES is a milestone in the implementation of FATCA," said IRS Commissioner John Koskinen. "With it, comes the start of a secure system of automated, standardized information exchanges among Government tax authorities. This will enhance our ability to detect hidden accounts and help ensure fairness in the tax system."

Where a jurisdiction has a reciprocal IGA and the necessary safeguards and infrastructure are in place, the IRS will also use the IDES to provide similar information to the HCTA on accounts in US financial institutions held by the jurisdiction's residents.

The IRS held a FATCA IDES open testing session from 2:00 am Eastern Daylight Time (EDT) on March 10, 2015, until 5:00 pm EDT on March 12. The test session was open to FFIs and HCTAs that had completed IDES enrollment by March 5, 2015. It is unclear how well the test went. But there are few signs that the result is going to make much difference to the inevitability of FATCA anyhow.


The US Expat Banking Lock-Out

FFIs on the other hand, are certainly being deterred from servicing existing and new US clients because of FATCA. Recent reports would appear to confirm anecdotal evidence that many FFIs want nothing to do with FATCA and are therefore "locking out" US customers by closing existing accounts and refusing to open new ones. And it is suggested that this is as much to do with FFIs fearing inadvertently falling short of the FATCA rules and paying a high financial and reputational price than it is the reporting requirements themselves.

While there are no concrete statistical reports to confirm the scale of the lock-out, a recent survey of expats conducted by Democrats Abroad, the overseas arm of the Democratic Party, suggests that one-in-six respondents have had their bank accounts shut. When extrapolated across the entire expat community of 7.8m, these findings suggest that over a million Americans are being denied access to basic financial services.

ACA says that this has been going on for a long time as a result of the "know your customer" provisions in the Patriot Act and FBAR. But FATCA, it warns, is only going to make things worse.

"All these reporting requirements, and the threat of penalties if the reporting is not complete and accurate, are causing some foreign banks and other financial institutions to cut off access by Americans overseas to foreign financial tools, such as mortgages, bank accounts, insurance policies, and pension funds, all of which are essential financial tools for survival overseas," ACA observes.

"At the same time, Patriot Act legislation currently contains know-your-client guidance that is leading US banks to close domestic US accounts held by Americans who no longer can provide a mailing address in the United States."


Same-Country Exception

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, ACA is recommending the FFI should 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, Marylouise Serrato, Executive Director of ACA 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."

"All these reporting requirements, and the threat of penalties if the reporting is not complete and accurate, are causing some foreign banks and other financial institutions to cut off access by Americans overseas to foreign financial tools, such as mortgages, bank accounts, insurance policies, and pension funds, all of which are essential financial tools for survival overseas," ACA observes.

"At the same time, Patriot Act legislation currently contains know-your-client guidance that is leading US banks to close domestic US accounts held by Americans who no longer can provide a mailing address in the United States."

As well as the FATCA same country exception, ACA also advocates easing Patriot Act guidance to facilitate state-side banking access for Americans overseas. 


Is Anyone Listening?

Whether the United States Congress is listening to the concerns of US expats or not is another matter. It certainly doesn't seem that way. Perhaps it's a case of 'out of sight, out of mind.' However, the almost-8m Americans residing abroad still amounts to a substantial unrepresented constituency.

While there is a Democratic President in the White House – this law was approved on President Barak Obama's watch – it is unlikely much will be done to alleviate the tax reporting burden on US citizens, whether they reside stateside or elsewhere in the world. There is much more sympathy to the plight of overtaxed expats (and residents) among Republicans, however, and the GOP currently controls Congress. There is little chance of legislation emerging amid the ongoing deadlock between Congress and the Government. But it will be interesting to see if things change should a Republican win the race for the White House in 2016.




 

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I just put my money in my French girlfriend's bank account, out of reach of the IRS.
I trust her a lot more than USA. What a barbarian, uncivilized country USA is turning out to be. We sure look ridiculous abroad now and can defend no right as a country that protects freedom anymore.
That's what happens when founders with good intention's pass away and these youngsters come on board making all the same mistakes all over again.

Steven, 2 years ago.

So what is the point making so much noise only about FATCA while not talking about FBAR on the same line. FATCA or not, if FBAR is still to be followed, may be not FFI but the American taxpayer will have the SAME UNNECESSARY and overall useful to none, reporting requirements. As for FBAR one of the unanswered issue also is what if an American Taxpayer retired overseas in a real low cost of living nation and have not enough income to be required to file U.S. tax return, WHY if he/she should be required to file FBAR? Does it make any sense. The overall answer is RBT system only.

U.S. Citizen, 2 years ago.
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