Understand FATCA: Taxing Americans living abroad

By NADAV SHEMER
June 30, 2011 23:00

Chairwoman, director of Switzerland-based US Tax and Financial Services sits with 'Post' discuss what the new regulations mean for American Israelis.




Darlene Hart

Darlene Hart 311. (photo credit: Courtesy)

Among the economic reforms introduced by the administration of US President Barack Obama in the aftermath of the global financial crisis, one particular piece of legislation will have a wide-reaching effect on millions of American living abroad.

FATCA, the Foreign Account Tax Compliance Act, passed into law in March 2010 as part of the HIRE Act and is set for implementation on January 1, 2013. It will give the United States more power than ever before to force Americans residing outside the US to become tax compliant. As of 2009, about 93 percent of nonresident Americans did not file US tax returns, according to government estimates, but this is something the current administration intends to change.

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Israel has one of the highest concentrations of Americans in the world, with the US Consulate in Tel Aviv saying it is aware of 137,000 of its citizens living here (within the Green Line), although it estimates the actual figure is somewhere between 200,000 and 300,000.

US Tax and Financial Services is a Zurich, Switzerland-based company that assists high-earning Americans living abroad with taxation issues. In recognition of the impact that FATCA will have on Americans living in Israel, it opened an office in Tel Aviv last week.

The company’s chairwoman, Darlene Hart, and director, Dr. Thomas Walford, sat down with The Jerusalem Post while on a visit here to discuss what the new regulations mean for American Israelis.

The Jerusalem Post: What are the taxation responsibilities of a US citizen living abroad?

Hart: “If you’re a green-card holder, or you’re an American citizen, and you’re living here in Israel, you have to file your tax return. It doesn’t necessarily mean you owe tax. I lived in England for 24 years and didn’t owe any tax to the US government, but I filed.

“A lot of people aren’t aware, because it’s not something you learn in grade school, it’s not something you learn in high school.

But there’s been enough press, especially since the UBS case [in which the Swiss banking giant handed over the names of account-holding US taxpayers in 2010 to avoid legal action from the IRS].”

So what has changed now?

Walford: “What has changed is not the tax rate, or the fines, but the ability of the American government to get reports from foreign financial institutions on those who are American.

“The whole story really goes back to the financial disaster of 2008-09. America has set off on a task of increasing the number of people it taxes; in other words, collecting the tax it is owed by the full community of American citizens.

“In Europe what they’ve tended to do is increase tax rates. They’ve introduced 50 percent rates in the UK; they’ve increased VAT [value-added tax] from 17.5% to 20%.

But the trouble is that increasing tax weighs down an economy. America has sought to keep tax rates constant but broaden the base over those who they get tax from.

“FATCA, the Foreign Account Tax Compliance Act, changes the whole game plan, because it brings in a set of rules that allows the US to impose a 30% withholding tax on all US investments, their income and the gross capital on sales of those investments.”

Hart: “As of January 1, 2013, for any non- US corporate entity, partnership, insurance company, pension, you name it – if they sell US stocks or bonds, 30% tax is withheld, unless that foreign financial institution, or FFI, signs an agreement with the US Treasury to hand over a list of their American clients.”

Who is considered American under this law?

Walford: “This legislation refers to ‘American persons,’ which has a wide definition. It includes people who have an American passport. But only 34% of Americans have a passport. There are people born in America, people who have adopted American citizenship, people who have a green card, and there are people who have one American parent, and as long as the parent has lived in America for more than five years after the age of 14 [they are considered American].”

Hart: “We just got a new client, whose mom and dad are Israeli. They [the client] moved to the United States 40 years ago, but mom and dad continued to live here [in Israel] until they died. The parents had a bank account in Zurich and also bought a lot of property here. They had a huge estate here, they have a huge estate in Switzerland.

“The problem is they [the children] never thought about it, because they’re paying tax in Israel on all their rental properties here and doing what they think needs to be done. And it’s not until we spoke to them and their trust company, which said, ‘By the way, you are supposed to be paying US tax or reporting your trust. Sorry, but you’re subject to US tax worldwide.’ They’ve lived there [in the US] for 40 years; these are two doctors, one is a surgeon and the other’s a psychologist. They’d never really paid much attention to it.

“There are an awful lot of people who don’t even think about this stuff, who don’t know. And now they’ve got to deal with it because the banks are going to be reporting.”

Are banks just able to give away people’s details that easily?

Hart: “Realistically the banks are not going to be able to avoid signing up to FATCA.”

Walford: “The banks, as part of signing up to FATCA, also have to navigate around their local laws to enable them to comply. If they sign up, they then have to provide the American government with the names, the address, the incomes and the assets of everyone who is American.

“No bank has actually asked somebody before: ‘Do you have another citizenship?’ And no bank has ever asked, ‘What is the nationality of your parents, where were they born, where did they grow up?’ So there’s a lot of work that the financial institutions need to do in collecting additional data about their clients before the start date on the first of January 2013.”

So how do US citizens stay tax compliant now that the government can get access to their details?

Walford: “The American government realizes there are a lot of people who are offside here. And like many countries, they have introduced a way to allow people to come onside again without fear of criminal prosecution. In 2009 they introduced an initiative which allowed people to declare and come forward voluntarily, to provide six years of back-tax forms and to pay the tax they owed.

“They introduced a new one in February of this year, which closes on the 31st of August. Therefore people who may not be up to date on their tax returns have only two months to come forward. They have an extra 90 days to provide all the tax information; they have to register in the program by the 31st of August.

“As you can see, there is an institutional problem, and there is an individual problem. What they did is as part of your entry into the voluntary disclosure initiative, they ask you to fill in a form. Who is your bank? Who are your advisers? Who is your auditor, your accountant, solicitor or lawyer? And they I’m sure have been compiling which names frequently occur, so that they already know which institutions to visit.”

What is the punishment for not completing a tax return?

Walford: “As part of the [tax] return that an American makes each year, there is a form called an FBAR – a Foreign Bank Account Report. The fine for [unintentionally] not completing your FBAR by the 30th of June of the year following the one to which it applies is $10,000 per account, per year. There’s a statute of limitation in the US of six years, so you’ve got six times 10 accounts times $10,000. That person, if he hasn’t been doing any returns, could owe the American government $600,000.”

Hart: “Could – the key word is could. They are not interested in hitting you over your head with a hammer, because nobody would come forward.

“There are what, 106,000 employees that work for the IRS? And you’ve got 180 million tax returns that are being filed. There’s no way the IRS can sit there and audit everyone. They do nothing but match employer records with employee records to make sure that people are filing returns.

“Because everything is done on the honor system in the United States, the IRS is hoping that everyone will comply. The only way they can convince everyone to comply is to scare the living daylights out of them.

“These penalties, the legislation, have always been on the books. The IRS chooses to either enforce or not to enforce, to assess or not to assess. And they have never assessed penalties from the year dot to December 31, 2008.”

Who do you see your company advising here in Israel?

Walford: “There is a real need here, for individuals who are perhaps not US tax compliant, who are US citizens, to become compliant as soon as possible. You have standard compliance work; in other words, completing the tax returns. But you also have groups, or family offices, with a lot of wealth spread around the world. They need advice on how they should organize it and how they can mitigate, reduce their exposure to tax, as opposed to not file and avoid tax.

“We have the corporate area. There are more Israeli companies quoted on NASDAQ than any other country except for the US and Canada; 150 are based here – they’ve all got executives, many of them have got green cards. They’ve all got tax issues, whether they’ve got a US holding company or US subsidiary. And they can potentially have US tax issues if they’ve got US subsidiaries and just hope to be quoted on NASDAQ.

“And of course lots of people over the years, particularly in the high-net-worth group, have chosen to hold their money in trusts. How much of the trust has to be American for the whole trust to be considered American? What happens to a family where one child trains in the United States and then decides to take up US citizenship, and they have a family trust? So the trust companies need advice, and so do the trustees.

“And then finally you’ve got the Israeli banks and financial institutions – such as the insurance companies, providence funds, mutual funds, the whole investment industry – who need to be able to apply the obligations they will inherit by signing up to FATCA.”


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