Your Taxes: US gives FATCA to the world

This article is for US taxpayers everywhere, including Israel.

The US Treasury recently announced it is engaged with more than 50 countries and jurisdictions, including Israel, to implement the information reporting and withholding tax provisions commonly known as the Foreign Account Tax Compliance Act (FATCA).

“Global cooperation is critical to implementing FATCA in a way that is targeted and efficient,” Assistant Secretary of the Treasury for Tax Policy Mark Mazur said. “By working cooperatively with foreign governments and financial institutions, we are intensifying our ability to combat tax evasion while minimizing burdens on financial institutions.”

This summer, the US Treasury published a model intergovernmental agreement for implementing FATCA and announced the development of a second model agreement. These models serve as the basis for concluding bilateral agreements with interested jurisdictions.

The Treasury Department has already concluded a bilateral agreement with the United Kingdom.

Jurisdictions with which the US Treasury is actively engaged in a dialogue toward concluding an intergovernmental agreement include Israel, Argentina, Australia, Belgium, the Cayman Islands, Cyprus, Estonia, Hungary, Korea, Liechtenstein, Malaysia, Malta, New Zealand, the Slovak Republic, Singapore and Sweden. Additional jurisdictions with which the US Treasury is in the process of finalizing an intergovernmental agreement include France, Germany, Italy, Spain, Japan, Switzerland, Canada, Denmark, Finland, Guernsey, Ireland, Isle of Man, Jersey, Mexico, the Netherlands and Norway.

The jurisdictions with which the US Treasury is working to explore options for intergovernmental engagement include Bermuda, Brazil, the British Virgin Islands, Chile, the Czech Republic, Gibraltar, India, Lebanon, Luxembourg, Romania, Russia, Seychelles, Saint Maarten, Slovenia and South Africa.

Summary of key FATCA provisions

According to the US Internal Revenue Service (IRS), FATCA, which was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, is an important development in US efforts to combat tax evasion by US persons holding investments in offshore accounts.

Under FATCA, certain US taxpayers holding financial assets outside the US must report those assets to the IRS. In addition, FATCA will require foreign financial institutions to report directly to the IRS certain information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest.

Reporting by US taxpayers holding foreign financial assets

According to the IRS, FATCA requires certain US taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938) that must be attached to the taxpayer’s annual tax return. Reporting applies for assets held in taxable years beginning after March 18, 2010. For most taxpayers this will be the 2011 tax return they should have filed during the 2012 tax-filing season. Failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification).

Underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent.

In addition, US taxpayers with a financial interest in, or signature authority over, a foreign financial account, including a bank account, brokerage account, mutual fund, trust or other type of foreign financial account, the Bank Secrecy Act may be required to report the account yearly to the IRS by filing Form TD F 90- 22.1, Report of Foreign Bank and Financial Accounts (FBAR).

US persons (citizens, green-card holders) are required to file an FBAR if: (1) the person had a financial interest in or signature authority over at least one financial account located outside of the US; and (2) the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year being reported. Penalties for noncompliance include civil penalties of $10,000 per year for non-willful violations; up to 50% of the aggregate account value, per year, for willful violations.

Reporting by foreign financial institutions

FATCA will also require foreign financial institutions (FFIs) to report directly to the IRS certain information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest.

Withholding agents, including participating FFIs, generally will be required to implement new account-opening procedures by January 1, 2014. To comply with these new reporting requirements, an FFI will have to enter into a special agreement with the IRS by June 30, 2013. Under this agreement a “participating” FFI will be obligated to: (1) undertake certain identification and due-diligence procedures with respect to its account holders; (2) report annually to the IRS on its account holders who are US persons or foreign entities with substantial US ownership; and (3) withhold and pay over to the IRS 30% of any payments of US source income, as well as gross proceeds from the sale of securities that generate US source income, made to (a) nonparticipating FFIs, (b) individual account holders failing to provide sufficient information to determine whether or not they are a US person, or (c) foreign entity account holders failing to provide sufficient information about the identity of its substantial US owners.

There will be a phased-in time line of key FATCA implementation dates for FFIs.

The above is a very brief summary from recent IRS announcements.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

leon@hcat.co Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.