The Foreign Account Tax Compliance Act (FATCA), which came into force after several months of delay on 1st July, 2014, is designed to discourage tax evasion by US taxpayers and it imposes significant obligations on foreign financial institutions (FFIs). However, the controversial federal law, enacted in 2010, has far-reaching extra-territorial implications not limited to the financial services industry.
Many activities of nonfinancial business will trigger these new compliance obligations. The definition of an FFI under FATCA is also broad and includes more types of entities that one might expect. Under FATCA, if an FFI fails to enter into the necessary reporting arrangements with the Internal Revenue Service (IRS), a 30% withholding tax is imposed on US source income and other US-related payments of the FFI.
PwC advises global organisations to focus on payment details such as which legal entity or department is authorizing or making the payment and the recipient, source and the character of the payment. Payments such as those for services, rents and royalties will be subject to information reporting and withholding requirements. One of the challenges for businesses will be updating systems and processes to distinguish between all of these types of payments. Foreign companies or individuals receiving US source payments may also be subject to the 30% FATCA withholding, and they will be asked to provide documentation about their non-US status and certify their FATCA classification.
Businesses that do not adhere to the new obligations may face a variety of consequences including the possible loss of 30% of the value of specific payments. Consistent with other US information reporting regimes, a payor who fails to deduct and remit FATCA withholding when required will be liable for 100% of the amount not withheld as well as related interest and penalties.
The reach of FATCA is widespread and to allow this extra-territoriality to work, dozens of inter-governmental agreements and treaties have been signed with numerous governments and agencies abroad and threats made to FFIs regarding their ability to transact in US Dollars if they do not comply.
For example, in the UK FFIs will be required to report the required information to the tax authority, HMRC, who in turn will pass the data to the IRS. Enabling legislation, to circumvent privacy legislation, has already been passed into law by Parliament.
FATCA is part of Hiring Incentives to Restore Employment (HIRE) Act of 2010, commonly known as the “jobs bill.” Ironically, under the Act, the employment of US expatriate citizens has become less attractive. If an employer offers help to relocate, provide tax services or use a foreign bank for payroll the burden and risk for the employer are raised.
FFIs have already begun to limit the account and investment services available to the 7.6 million US expatriates and 13 million greencard holders, their families, US businesses with overseas interests and others. Spouses of US citizens have reportedly had their accounts closed, Fidelity has announced it will no longer sell mutual funds to expatriate Americans and certain banks in Switzerland and Singapore are reportedly declining to open accounts for US citizens.
As a consequence more Americans are renouncing their US passports that at any time in the past. In the first nine months of this year, 2,353 Americans have renounced their citizenship, close to the all-time high of 2,369 in the first nine months of 2013.
So far, the cost and complexity of implementation of the law has been extraordinary. The cost of compliance with FATCA has been estimated at over USD eight billion annually and the benefit to the IRS is forecast at less than USD 800 million by the House Ways and Means committee.