Topic: Foreign Accounts
What has been deemed as the first time a country will impose an overtly extraterritorial tax regime, FATCA and its ramifications prove worrisome for many in the financial planning world. As has been reported, the United Kingdom was the first to complete an intergovernmental agreement (IGA) with the United States under the new FATCA reporting regime. Although the agreement is scheduled to go into effect next year, a better understanding of its provisions is coming to light. Under this IGA, banks will be expected to pass along information on U.S. accounts of $50,000 or more to HM Revenue & Customs, which will then transfer the information to the U.S. authorities.
Failure to comply with the requirements of FATCA will result in 30% percent U.S. withholding on any dividends or income and sale proceeds from U.S. assets held by such companies. The withholding responsibility falls to the financial groups that have undertaken to assess the levy on behalf of the IRS. However, accountants estimate that it could cost institutions more than $100 million to become compliant. One fund manager calls this disastrous for some companies because, “no one will want to work for or invest with a financial institution where that might be the case.”
According to Tom Humphries, a tax partner at the law firm of Morrison & Foerster in New York, “The U.K. is technically becoming a part of the IRS system and U.K. institutions will need to familiarize themselves with the workings of the system and tax principles, which are inevitably rather complex.” Despite the logistical difficulty, U.K. institutions are assured that no withholding penalties will be assessed so long as the U.S. receives information and any evidence of U.S. citizens committing tax evasion.
Not far behind the United Kingdom are Spain, France, Germany, and Italy, which reportedly are close to having their own IGAs. Moreover, Ireland, Luxemburg, and Japan are in talks with the United States. Some countries are nevertheless still resistant, Hong Kong for instance. Hong Kong, which happens to be a top financial center will be one of the locations where FATCA’s effect will be most visible, but so long as international support is disjointed FATCA will continue to cause uncertainty. Roger Exwood, a BlackRock fund manager warns, “Financial institutions need to be confident IGAs will be signed by every jurisdiction they operate in to avoid complications.” For example, if an EU country does not have an IGA, a financial institution supplying information to the IRS could fall foul of the EU directive on personal data privacy.
As this piece of legislation develops on the world stage the chance of keeping foreign accounts hidden grows less likely. It is in a taxpayer’s best interest to consult a knowledgeable tax attorney and come into compliance.