FATCA released shock waves among Americans overseas, because it compels foreign financial institutions to report on their accounts to the US Internal Revenue Service. The IRS will thus be able to check their private accounts against what they report on their tax returns. It gives the US government an eye into the personal affairs of these Americans, allowing it to see what sums have entered or left their accounts, to and from whom, and when this occurred.
The Foreign Account Tax Compliance Act (FATCA) grants the IRS power to do with financial information what the NSA has done with communications data. Similar to how the NSA justifies their invasion of privacy on the need to prevent acts of terrorism, FATCA cites reducing tax evasion as reason to treat any American living, banking or investing overseas as guilty until proven innocent and undeserving of basic constitutional protections
Passed in 2010 as part of the HIRE (Hiring Incentives to Restore Employment) Act, FATCA conscripts foreign financial institutions as agents of the IRS, demanding that they monitor and report at their own expense on U.S. clients. Should they refuse or otherwise fail to convince the IRS that they are doing a sufficient job at spying on American citizens, they will fcce a 30 percent withholding tax on all U.S. source payments. Anyone considered a U.S. taxpayer is also required to reveal all of their foreign-held assets to the IRS, with stiff penalties for even the slightest oversight or delay.
The law while aimed at curbing tax evasion, in practice it will do little to accomplish that goal. Rather than target individuals or institutions at risk for engaging in tax evasion or unlawful behavior, FATCA hits every financial institution in the world with unreasonably costly burdens that have caused many to simply refuse to accept American clients.
Gulf News earlier this year reported” Some banks in the UAE are even considering closing accounts or turning away American expats if they fail to provide certain information to comply with US tax laws or, in other cases, for no specific reason. In a letter sent in May to their customers who are US passport holders, US green card and account holders born in the United States, a local bank requested an updated passport copy and IRS Tax Account Number stating that “tis information is required for complying with the US Foreign Account Tax Compliance Act (‘Fatca’) 2010”. “If … you do not update your records with the bank by June 30, 2013, we may be constrained to close your account with the bank,”
Likewise fed up with excessive paperwork and invasive rules, record numbers of Americans are renouncing their citizenship. According to the IRS, “If you are a US citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income
To make matters worse, institutions that seek to avoid FATCA’s high costs are also taking their investments out of the U.S. economy. With trillions invested in the U.S. from foreign sources each year, a loss of a mere fraction of this could spark another recession. It’s thus easy to see why the Joint Committee on Taxation estimated the law would raise a paltry $800 million per year, which is less than 1 percent of the $100 billion the law’s backers dubiously claim is lost to tax evasion each year.
The US government originally set a deadline of January 1, 2014 for FFIs to register with the IRS. Though reporting was not due to start till 2015 data needed to be collected for 2014. In July this year , however, the US Department of the Treasury issued a notice announcing a six-month delay of the implementation of the FATCA.
In many countries its implementation could lead financial institutions to break domestic laws barring the reporting of bank information to third parties or foreign governments. In other words financial institutions are exepcted to contravene domestic legislation to comply with the diktat of a foreign entity, the IRS. This absurd situation has pushed the US Treasury Department to negotiate inter-governmental agreements, or IGAs, with foreign countries to override such legal barriers. THE U.A.E. banks are in consultation with the central bank’s about this.
As an example of the problems posed, tts been estimated for example that 20,000 Kuwaiti citizens hold the American passport and they are to be subjected to observe the new law and to pay taxes based on their income, property and salaries they receive in Kuwait.However, the Kuwaiti citizenship law bans citizens from holding the citizenship of other countries, yet nearly 2 percent of Kuwaitis hold the American passport besides the nationalities of other European countries, sources noted. This is liley to be issue that will embarrass the Kuwaiti government and the citizens in question.
The core of the IGAs is reciprocity: The United States promises to give foreign states information on their nationals with accounts in US financial institutions in exchange for their implementation of FATCA. While the US is virtually alone in taxing its citizens on their worldwide income, many countries are nevertheless interested in knowing what their citizens hold in accounts overseas, for the day when they decide to return home and re-enter the tax system. However, see this article which questions the practiclaity and legality of such reciprocity http://www.repealfatca.com/index.asp?idmenu=4&title=News&idsubmenu=130
FATCA thus emerged as a potent issue. American banks now realise that they too will be saddled with costly reporting requirements to IGA partners, and to numerous foreign governments. Both the Texas Bankers Association and the Florida Bankers Association filed a federal lawsuit against the Treasury Department and the IRS saying they would lose billions of dollars from the measure, and that the regulations imposed on them were improper.
The negative constitutional implications of imposed reciprocity were echoed by Rand Paul. “The Treasury Department, without the consent and authority of Congress, will force U.S. financial institutions to provide the bank account information of private customers to foreign nations,” his press release read. His hostility to FATCA is primarily grounded in his concern for privacy. That is, indeed, what is for many the most shocking aspect of the legislation, which asks foreign institutions to gather data on Americans without oversight or security guarantees, when most Americans at home would reject such monitoring.
The US banking sector, which doesn’t like FATCA’s implications, is influential in Congress. More generally, the United States will lose money if foreigners, who don’t want their finances revealed back home, start closing accounts and taking their money elsewhere.
The Credit Union National Association, which represents a majority of American credit unions, has also backed Paul’s bill. Like the banks, it fears that the IGAs will impose high costs on credit unions and undermine the privacy of their members.
Americans in many countries have been unable to open bank accounts, because banks do not want the headache of reporting back to the IRS. This has created difficulties for American employees of American companies operating abroad. All this comes at a fluid time when there has been discussion of rewriting the US tax code and public unease with efforts to expand the government’s powers of surveillance.
The USA Treasury website tries to dispel fears by addressing what it termrs myths about FATCA http://www.treasury.gov/connect/blog/Pages/Myth-vs-FATCA.aspx and for the counter aguments see http://www.repealfatca.com/index.asp?idmenu=4&title=News&idsubmenu=135
The UAE Central bank organised a seminar in March this year and Gulf News reported that Sultan Bin Nasser Al Suwaidi, Governor of the Central Bank, in his opening remarks underlined the need for the regulatory authorities in the UAE to formulate procedures to facilitate compliance with the US FATCA and set clear instructions for financial institutions under their supervision, in line with the requirements of the above law. He said that the competent authorities in the UAE are considering signing an agreement with the Government of the United States of America for FATCA Compliance.
Saudi Arabia has already signed agreements with accounting firms Ernst & Young, Pricewater-houseCoopers and KBMG to participate in the implementation.
The law requires that foreign financial institutions report the name, address, account number and financial activity of US taxpayers who have assets exceeding $50,000 to the IRS
Banks and other financial institutions are facing up to a new reality. The costs of meeting an expanding roster of regulatory requirements are rising at the same time as an increasingly competitive market is putting pressure on margins. At last week’s Sibos event Werner Steinmueller, head of global transaction banking at Deutsche Bank said “I expect much of the discussion to be focused on the growing cost of meeting regulatory requirements,”
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