EspañolOn July 1, the Foreign Account Tax Compliance Act (FATCA) went into effect in the United States. The law aims to take action against tax evasion by US persons who hold foreign bank accounts.
Since its enactment, the law has been a cause for concern among taxpayers with a second citizenship or who live outside the United States.
FATCA affects more than 77,000 banks and financial institutions around the world and has the support of 70 countries, including Mexico, Chile, Canada, Brazil, and Costa Rica.
The legislation, passed by the US Congress in 2010, will be gradually implemented and is designed to facilitate the tax collecting duties of the Internal Revenue Service (IRS). All foreign financial institutions (FFI) and non-financial foreign entities (NFEE) receiving funds from US accounts are subject to this law.
Through FATCA, the IRS requires that investment funds, banks, and other financial institutions transfer the names, account numbers, and balances of clients holding accounts with balances in excess of US$50,000 to the US government. As Forbes explains, FATCA also mandates institutions to withhold a 30 percent penalty on payments or transfers to any foreign entity that refuses to fully comply with the law’s guidelines.
“It may be that FATCA will enable the IRS to reduce tax evasion, but better mechanisms are required to go through all the information efficiently and act on it accordingly,” said Benito Rivera, professor at the School of Advanced Studies at Mexico’s National Autonomous University, in an interview with the IPS news agency.
In Latin America, 3,800 bilateral agreements have already been signed with the United States, while there are around 800 institutions in the region that have not yet started negotiations.
The law enforces compliance in two steps: first, the foreign financial institution must report to its national tax agency, which in turn it sends the documentation to the IRS.
“There’s no doubt about the strong international support for FATCA,” said US Treasury Deputy Secretary Robert Stack.
Burdening Consequences
“This law is incredibly complicated and we must ask if the costs don’t outweigh its benefits,” said Payson Peabody, a representative of the Securities Industry and Financial Markets Association (SIFMA). In an interview with Agence France Presse, he added that this legislation transfers the burden of finding and investigating tax evasion to foreign financial institutions.
Lynne Swanson, a Canadian resident, renounced her US citizenship to avoid being targeted by this new law. “If China, Russia, Iran, or Eritrea were doing this, it would be a scandal,” she remarked.
Although the law makes it more difficult to use traditional methods of tax evasion, Heather Lowe, an analyst for Global Financial Integrity, believes “there is no doubt that people will find ways to circumvent the law.” She suggests those looking to avoid paying taxes will search out banks in countries that are not on the IRS radar or refuse to comply with FATCA.
You Don't Know The Consequence of #FATCA | EconMatters http://t.co/rgkDJgKIlU – One will be to avoid #Americansabroad in all capacities
— U.S. Citizen Abroad (@USCitizenAbroad) July 4, 2014
Nigel Green, CEO of deVere financial consultancy group, called the law “horrendous” for the US economy and a “nightmare” for expatriates.
The Financial Post reported that the board of directors of the Vancouver City Savings Credit Union, or Vancity, strongly opposed the regulation, saying that its implementation could have a negative effect on privacy, liberty, due process, and Canadian sovereignty
Many find themselves in situations like that of Stephen Kish, a professor at the University of Toronto, who holds both United States and Canadian citizenship. He told the Financial Post that the Obama administration had no right to impose one nationality over the other without his consent.