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International Investors Take Notice: FATCA Takes Effect on July 01, 2014

images (26)On July 01, 2014 international investors will begin to feel the effects of the Foreign Account Tax Compliance Act (FATCA). The goal of the law is to find offshore accounts held by United States (US) taxpayers seeking to avoid paying taxes on them. The law will ask banks from around the world to comply with an act passed by the United States government. Banks will be expected to take a look at their accounts looking for clients with American connections. The government of the United States then will expect those banks with such customers to share this information with the Internal Revenue Service (IRS) of the United States.

The government of the United States and its tax enforcing agency the IRS, claim their only purpose is to locate and go after tax cheats but as with any new law there will be unintended consequences of the provision.

It is well known that over 2 trillion dollars USD (United States Dollar) earned overseas by American corporations have not been repatriated because of the present tax liability in the United States. The corporate tax rate at 35% is among the highest in the world. It is true that with proper tax planning the effective rate is only 12.6% but there are costs involved with attempting to getting the tax rate down. Larger businesses and corporations find this activity in tax avoidance, much more affordable and worthwhile because of these cost incursions.

images (32)This U.S. law was enacted in 2010 by the then Democratic controlled Congress. There was little legislative review of this act in that it was placed into an unrelated jobs bill. It will indeed, ensnare American citizens attempting to escape U.S. tax liability, but it will also create a system that all international banks,credit unions,pension funds,investment accounts, business accounts and insurance companies will become an extension of the American IRS.

Beginning in 2015 the United States government will expect these same institutions to begin withholding money for tax purposes for these  foreign held accounts.

Unintended Consequences

Unintended Consequences

The unintended consequences already began to be reported in 2013.  Americans living overseas in many different locations, found that it was easier for foreign institutions to divest themselves of American accounts, then worry about compliance with US tax laws.

American citizens living abroad witnessed their accounts being closed without notice. The explanation often given was that the usual services provided by the bank or institution, were no longer available to American citizens.

The liquidation of these accounts caused financial disruption and losses for countless Americans. The action was taken against regular bank accounts to mutual funds, pension allocations, and other investment vehicles.

For those individuals hit with this action it immediately made those funds distributed subject to taxation, if they had been held for investment or retirement purposes.

250px-UBS_299ParkAveVerticalYou may be wondering why would banks voluntarily give up business opportunities? Well, a number of banks and financial institutions around the world have been hit with law suits over the past few years by the United States government. The most notorious case was in Switzerland where in 2008, UBS was caught in a tax evasion suit. As the largest financial institution in the country UBS had helped wealthy Americans hide billions of dollars from tax liability. The money was held in a variety of undisclosed offshore accounts. The bank had to pay a $780 million (USD) fine as well as being forced to release the names of 250 suspected American tax dodgers. This case dramatically changed how the Swiss and other nations deal with undeclared money from the United States.

The United States is the only nation besides Eritrea that taxes its citizens who live abroad. This is the case even if the money is earned in a foreign country and they live overseas permanently. This can often lead to American citizens being taxed twice. The host country taxes them and the United States government wants them to pay as well.

This double taxation often forces individuals to make the decision to relinquish their American citizenship. Thousands of former American citizens and those holding Green Cards (residents) have taken this route for financial reasons.images (29)

The FATCA requires all foreign banks to report to the American IRS assets exceeding $50,000 USD held by US citizens.

Americans living abroad may find it difficult or in some cases impossible to open bank accounts or qualify for a mortgage in their host country. It can even make renting a property somewhat difficult. This is the case, even if they are married to a national in the country they reside in together. It is estimated that over 7 million Americans who live abroad will face these same problems beginning in July of this year.

You might be wondering why these financial institutions would be willing to tolerate this intrusion in their affairs, by the American government and its tax agency? The answer is two fold. One is the consequences for a bank or financial organization that fails to abide by the new American tax laws. The fines can be quite high if a lawsuit results as well as other actions that can be taken by US authorities.

images (27)The American IRS can legally withhold 30% of dividends and interest payments due to the banks from US accounts. If a bank fails to comply with the new regulations their ability to conduct business in the United States could become difficult. For example, an indictment could bar the financial institution from all capital markets in the United States altogether.

The compliance to the new United States tax rules do not come cheap for international financial institutions. Banks have to set up special units to deal with American clients if they continue to wish to have them as customers. It will cost billions for these establishments to remain compliant around the world. In Switzerland alone for example, the cost of cooperation with the FATCA regulations will cost in excess of $10 million USD for the bigger financial organizations. That is why numerous banks and other commercial enterprises choose to not deal with American customers and accounts. It has become too costly, and they would rather not deal with the meddlesome American government.

images (37)In the drive to raise tax revenue the United States government is not only making life difficult for the millions of Americans who live abroad. They are unwittingly contributing to more and more international businesses becoming unwilling to deal with the United States and its citizenry. It puts American businessmen and their companies at a distinct disadvantage overseas. The American economy will take another hit to be sure. Slower growth will be the end result.

There will be a consequence to the American dollar as well. As the cost of doing business with the United States increases it makes investors and business people less willing to engage in commercial activities involving the United States. There will be a declining demand for American dollars putting even more pressure on the value of the dollar as the consequences of FATCA begins to multiply.

 

 

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