is costing billions of dollars to set up and will only raise a fraction of that amount in taxes for the US government, but the controversial tax law looks here to stay.
However, the news is not all bad, since US expats can mitigate their tax bills with a little help from financial professionals.
The Foreign Account Tax Compliance Act, known as FATCA, is aimed at forcing foreign financial institutions to reveal details of their US clients for tax purposes from January 1, 2014.
The target is any American taxpayer with overseas bank accounts or investments who neglects to tell the Internal Revenue Service (IRS) about any interest or earnings from their wealth.
The penalties for non-compliance include fines for the taxpayers and sanctions against foreign financial institutions (FFIs) that fail to inform the IRS about their US account holders.
FATCA is fast creating a two-speed tax system. More than 50 countries are rushing to sign up – but many are noticeable y their indifference – especially in the Asia Pacific.
What does FATCA mean for US taxpayers?
The full ramifications of what FATCA will actually bring are still being digested and there could yet be more alterations to the legislation.
Essentially, all offshore assets for anyone who is eligible for paying US taxes caught in the FATCA net.
The US is the only country that taxes citizens no matter where they live in the world – and with an estimated seven million expats overseas, a huge number of FFIs need to comply with the law.
The main aim of FATCA is to life the veil of secrecy of from banks, investment funds and other financial institutions by requiring them to tell the IRS the details of any holding they have by or on behalf of US citizens.
Switzerland is perhaps the biggest name to fall as the government signed up to a tax information swapping agreement with the US.
For many though, the FATCA legislation will not deliver.
Refusing to comply
One critic is Nigel Green, chief executive of the deVere Group, one of the world’s largest independent financial advisers, who explains he fails to understand why the world’s banks have to go to so much expense to help the US government.
“I would really love to know what the US is getting out of this law except huge expense to the world’s banks and an extraordinary amount of aggravation to its citizens,” he said.
“The stated aim of the US government is that FATCA will stop expats hiding money and not paying tax on it. I don’t believe them.”
“Why do US citizens have to pay tax when they live abroad anyway? No other country does this.”
“Also, we will find that FATCA will not be as effective as its proponents claim since China and Taiwan will inevitably refuse to implement the law.”
As time goes on, increasing numbers of financial institutions are questioning why they are taking part and, intriguingly, the penny seems to have dropped with US financial institutions that they too are going to be saddled with huge compliance costs.
That’s because their government’s own intergovernmental agreements with the likes of the UK, Switzerland, Spain and Italy also compel America’s financial institutions to hand over reciprocal information on their foreign clients.
This has not gone down too well, and there is a growing chorus of discontent in Washington at what the act means for US-based banks.
This is a growing problem and the IRS recently announced that banks in the US “were not subject to the same reporting requirements as their foreign counterparts” which may call into question how equal the newly signed reciprocal agreements are.
However, there are a number of options available to US citizens wanting to avoid the FATCA tax net.
Firstly, the most obvious action is to close overseas accounts, though if they live and work overseas they may need local cash to cover day-to-day living.
Don’t forget to declare the closures, as the IRS is seeking retrospective information from FFIs to capture taxpayers trying to dodge the law.
Many may find that their banks and other financial institutions decide they do not want the hassle of complying with FATCA and are closing the accounts of their US clients. This is going to cause a wide range of issues if the US taxpayer has a mortgage or a loan that suddenly needs repaying.
Secondly, there are caveats to the intergovernmental agreements and the potential tax bill may be less than feared in most countries.
For instance, the Swiss agreement gives exemptions to pensions.
Anyone facing a potential tax bill for their overseas assets should take steps to find professional advice to work out what exactly they should do.
Saving tax dollars
That’s where firms like deVere Group, which has advisors in 66 countries, can help.
“Receiving the correct advice at the right time could prove crucial in your dealings with the Internal Revenue Service. That’s where we can prove to be vital and save the client tax dollars,” said Mr Green
“There’s no doubt that America is bullying foreign financial institutions and governments into acting as de facto snooping agents for the Internal Revenue Service.
“The deadline for compliance is January 2014 but I believe that this dangerous project will stumble before then.”