What is the Foreign Accounts Tax Compliance Act (FATCA)?
The Foreign Account Tax Compliance Act (FATCA) is a tax law that requires US citizens at home and abroad to file annual reports on all foreign accounts. FATCA was approved in 2020 under the HIRE Act to promote transparency in the global financial services sector.
Understanding the law on fiscal compliance of foreign accounts (FATCA)
President Barack Obama’s 2020 Hiring Incentives to Restore Jobs (HIRE) Act was introduced to encourage companies to hire unemployed workers to reduce the high unemployment caused by the 2008 financial crisis One of the incentives offered to employers through the HIRE Act includes an increase in the business tax credit for each new employee hired and retained for at least 52 weeks. Other incentives include tax holiday benefits and an increase in the company’s expense deduction limit for new equipment purchased in 2020.
To finance the costs of these incentives, Congress has included income-generating provisions in the HIRE Act through FATCA. The provisions of FATCA require all US taxpayers to report all assets held outside the country each year. By taxing these assets held abroad, the United States is increasing their source of income, which is used for their job stimulation incentive account. Penalties are imposed on residents of the United States who do not report their foreign account assets and assets worth more than $ 50,000 in any given year.
Non-American Foreign financial institutions (FFI) and foreign non-financial entities (NFFE) are also required to comply with this law by disclosing the identity of American citizens and the value of their assets held in their banks to the Internal Revenue. Service (IRS) or the FATCA Intergovernmental Agreement (IGA). FFIs who do not comply with the IRS will not only be excluded from the US market, but will also have 30% of the amount of any withheld payments deducted and withheld as tax penalties. Withholding taxes refer in this case to the income generated by the American financial assets held by these banks and include interest, dividends, remuneration, wages and salaries, compensation, periodic profits, etc. the address and tax identification number (TIN) of each account holder who meets the criteria for a US citizen; the account number; the account balance; and all deposits and withdrawals to the account for the year.
While the price for not complying with FATCA is high, the costs of compliance are also high. TD Bank, Barclays and Credit Suisse are said to have spent millions of dollars fighting this law, as they faced compliance costs of approximately $ 100 million. Large banks like HSBC, Commerzbank and Deutsche, after the law was passed, either limited services to Americans or stopped serving American investors altogether to mitigate the high cost of compliance.
FATCA seeks to eliminate tax evasion for American individuals and businesses that invest, operate and earn taxable income abroad. While it is not illegal to control an offshore account, the failure to disclose the account is considered illegal since the United States taxes all income and assets of its citizens worldwide.