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On January 10, 2014, the US Treasury Department announced that Italy signed an intergovernmental Foreign Account Tax Compliance Act (FATCA) agreement with the U.S. resulting in disclosure of the identity of U.S. taxpayers who own or control bank or other financial accounts in Italy.
This is just one more nail in the coffin for international bank secrecy. More importantly, the U.S. Treasury Department announced a flurry of year-end FATCA Agreements with “tax haven” nations, including the Cayman Islands, Bermuda, Costa Rica, Guernsey, Isle of Man, Jersey, and Malta – countries commonly considered to be active “tax havens” for wealthy Americans.
The U.S. is also in the final stages of negotiating a FATCA Agreement with the British Virgin Islands (BVI), another island nation popular for protecting the secrecy of its wealthy depositors.
FATCA Agreements now cover 20 countries. The other countries that have entered into FATCA Agreements with the U.S. include Switzerland, France, Spain, Germany, United Kingdom, Japan, Ireland, Mexico, Norway and Denmark and others.
Robert B. Stack, Deputy Assistant Secretary of the Treasury for International Affairs recently stated, “FATCA continues to gather momentum as we work with partners worldwide to combat offshore tax evasion. The large number of signings in one week alone sends a strong signal to tax evaders everywhere: international support for FATCA is growing.” Although FATCA was enacted in 2010 by the U.S. Congress to help the IRS target and find the secret foreign accounts and unreported foreign income of American taxpayers, the deadline for FATCA compliance by foreign financial institutions is just arriving and implementation is scheduled for July 1, 2014.
As implementation fast approaches and the universe of tax haven countries that have not entered into FATCA Agreements with the U.S. is shrinking, the ability of U.S. taxpayers to open or maintain secret foreign accounts has begun to disappear.
Under FACTA, foreign financial institutions, either directly or in some cases using their own country government as a conduit, are required to identify American account holders and their income to the IRS. The definition of “foreign financial account” is broad and includes many assets not generally thought of as a financial account. Among those “financial assets” are foreign retirement accounts, certain insurance policies, net lease payments, and the stock of foreign companies. FATCA is a dragnet being used by the IRS to combat offshore tax evasion on a worldwide basis. Foreign financial institutions that fail to comply with FACTA will face a 30% withholding tax on their US-source income.
As implementation nears, many foreign banks and financial institutions are seeking to avoid the high cost of implementation while avoiding the stiff penalties for non-compliance. Many foreign banks and financial institutions are actively closing existing American owned accounts and are refusing to open new ones. Although FATCA is the product of hundreds of pages of legislation and regulations, the concept is easy to understand. U.S. banks and financial institutions are already required to report the identity and income of their account holders directly to the IRS through the filing of 1099 information. FATCA extends a similar requirement to all foreign financial institutions. Foreign financial institutions must take significant steps to identify their U.S. customers and report them to the IRS. The U.S. is requiring the use of this blunt tool whether or not it conflicts with local bank secrecy laws or the home country’s constitution.
With FATCA implantation for financial institutions set to begin this July, the IRS has redesigned and updated its FATCA web pages, which will soon allow banks to begin signing up with the IRS and comply with FACTA.
The law firm of Fried & Rosefelt LLC focuses on solving complex tax controversies and problems, tax-related financial issues, civil and criminal tax litigation, inbound U.S real estate and business transactions, international real estate and business transactions, international estate planning, asset protection planning on a worldwide basis. The firm also does domestic tax and estate planning in the Washington, DC metropolitan area, including all areas of Maryland, DC, and Virginia. Many of our local Washington DC metropolitan area clients reside or have business entities based or operating, in Bethesda, Rockville, Potomac, Gaithersburg, Columbia, Silver Spring, Frederick, Annapolis, Lanham, and Greenbelt, Maryland, or Arlington, Alexandria, Fairfax, McLean, Vienna, Reston, McLean, Springfield, and Loudon County, Virginia. If you have a tax or tax controversy issue, call Fried & Rosefelt today at (301) 656-8525.