What Is FATCA?

The FATCA or the Foreign Account Tax Compliance Act is a US tax law incorporated in 2010. This tax law compels the US citizens in the US and abroad to file annual reports covering details about any foreign account holdings. FATCA was crafted as a part of the HIRE Act in an attempt to endorse transparency, particularly in the global financial services sector. This American law was established in order to prevent US taxpayer holding accounts outside the US to evade American taxes. Anyone holding the US person status such as a person with the US as his/her place of birth, and US green card holders under this act are required to report their non-US financial assets and identities to Internal Revenue Service (IRS) through a Form 8938. This is an additional requirement to the older requirement to self-report the same annually to the Financial Crimes Enforcement Network (FinCEN) through form 114. In order to ensure that people covered under this act cannot evade tax, the US government makes all non-US or foreign financial institutions (FFIs) to examine their records for individuals that have a US person status and report the identities and assets of such individuals to the US Department of the Treasury.

How Does FATCA work?

With FATCA offshore banking has become more complicated. Through the FATCA the US government demands tax from individuals, governments, and institutions all across the globe concerning US persons, US green card holders and citizens of the USA. If foreign banks and sovereign governments refuse to turn over all financial details about US persons to IRS, the US government levies a 30% withholding tax on them. This tax levies to the assets of brokerage houses, offshore banks or any other foreign financial institution. The foreign financial institution that does not cooperate with IRS is excluded from the US market altogether. The 30 % of withholding tax is levied on them on any withhold income generated from the US such as dividends, interests, wages, remunerations, periodic profits, compensations, salaries, etc.

Some financial products and account types that are deemed to have a low risk of tax evasion are exempt from FATCA. Some of them are Tax Free Savings Accounts (TFSAs), Registered Pension Plans (RPP), Registered Disability Savings Plans (RDSPs), Registered Retirement Income Funds (RRIFs), Registered Education Savings Plans (RESPs), Registered Retirement Savings Plans (RRSPs), Mastercard, Mortgages, loans, lines of credit and Agri-Invest accounts. Individuals with an investment account or a foreign bank account are required to file the FinCEN Form 114 if their accounts meet the specified threshold amount. This form was formerly known as the FBAR form. However, FBAR forms are no longer in use. There is no age bar applicable for filing this form. If a US person is unable to file the form himself/herself, their guardian is supposed to file it for him/her. The reporting threshold for individuals is $75000. This implies that during the year, if at any point of time if the total of all the investment and or bank accounts exceeds $75,000, it needs to be reported diligently via FinCen. The threshold for the total value of foreign financial assets on the last day of the calendar year is $50,000.In case you receive income such as dividends and interests from your investment account or bank account, you need to timely report it through your tax return to avoid facing unnecessary penalties from IRS.

The FBAR form along with FinCEN form should be filed electronically. Physical filing of these forms is not accepted. FBAR forms can be filed by professional taxpayers electronically. However, individuals have the option to register with FinCEN at the BSA website.

Who Is Affected By FATCA

With US giving so much importance to FATCA, it is crucial to understand whether you stand affected by the FATCA or not. If you are affected by FATCA you must know what are the things you need to do to correctly comply with this law? If any of the below-mentioned conditions apply to you, then you are standing under the scrutiny of FATCA.

  • Worldwide governments
  • US investment houses and banks that associate their operations with foreign financial institutions and foreign banks.
  • Foreign financial institutions such as investment houses, banks, etc
  • Businesses that are owned by a one or more US persons or businesses that have US persons as the majority of their shareholders.
  • If you fall under the definition if US person such as resident aliens (green card holders), US citizens, people born in USA you have to comply to FATCA regulations irrespective of where in the world you reside.

What Is Considered As The Foreign Bank Account?

The following is a list of the kind of accounts that are perceived as foreign financial accounts and that would need to be duly and diligently reported.

  • A financial deposit or custodian account that is held at a foreign financial institution.
  • A financial account that is held at any foreign branch of a US financial institutions.
  • Foreign mutual funds.
  • Securities or stocks held at any foreign financial institution.
  • Foreign issued annuity or life insurance that has a cash-out value.

Accounts that you don’t need a report on FBAR and are not considered as foreign bank account are as follows:

  • Gems, precious metals and foreign currency held directly.
  • Any foreign real estate held through a foreign entity or held directly.
  • Foreign securities and stocks not held in a financial institution.
  • US mutual funds that invest in foreign securities and stock.

A financial account that is held at a US branch of a foreign financial institution.

Information Needs To Be Filed

Information that you need to file on the FBAR form is as follows:

  • Your Name, address, and social security number.
  • In case there are any joint owners of the account, you will require to include the name, address and the social security number of the joint owner as well.
  • All bank account related information such as bank name and bank address
  • Account number
  • The bank account type- deposit account such as savings account, checking account; securities account such as mutual funds and stocks; and any other type of account that fits the criteria.
  • The number of joint owners of the account
  • The Maximum value of the account held in a specified calendar year( value to be shown in US dollars by using the year-end exchange rate of the US Treasury Department.

FATCA Global Scenario

FATCA is a very attractive concept for many countries other than the USA. It has inspired global initiatives such as CRS, AEOI, and BEPS. Most governments will not like to lose the chance of getting their hands on more money. Countries all across the world have either adopted FATCA are currently under the process of implementing it. Some such countries include the following:

Argentina
Anguilla
Austria
Australia
Aruba
Antigua and Barbuda
Andorra
Albania
Belgium
Barbados
Bermuda
The British Virgin Islands
Brunei Darussalam
Brazil
Belize
The Bahamas
Bulgaria
Cayman Islands
Columbia
Chile
China
Cook Islands
Canada
Costa Rica
Czech Republic
Cyprus
Curacao
Croatia
Denmark
Dominica
Estonia
France
Finland
Faroc islands
Greenland
Greece
Gibraltar
Germany
Guernsey
Ghana
Grenada
Hungary
Hong Kong (China)
India
Iceland
Italy
Ireland
Isle of Man
Indonesia
Israel
Jersey
Japan
Korea
Lithuania
Liechtenstein
Latvia
Luxembourg
Lebanon
Montserrat
Mexico
Malta
Monaco
Malaysia
Macau (China)
Mauritius
Marshall Islands
Norway
Niue
Netherlands
Nauru
New Zealand
Portugal
Poland
Pakistan
Panama
Russia
Romania
San Marino
Sweden
Spain
South Africa
Slovenia
Saint Kitts and Nevis
Samoa
Saudi Arabia
Singapore
Saint Vincent and the Grenadines
Sint Maarten
Saint Lucia
Switzerland
Slovak Republic
Seychelles
Trinidad and Tobago
Turkey
Caicos Islands
United Kingdom
Uruguay
United Arab Emirates
Vanuatu

A total of 104 countries are expected to adopt this law and increase its capital pool in the name of protection against tax evasion, good governance, and global fiscal transparency. Since most of the countries inclusive of USA are indebted,  any means of more fundraising is always crucial. FATCA makes it almost impossible for people affected by it to save on taxes in any way.

With FATCA in the picture there has been an increase in the percentage and the number of US citizenship renunciation each year. 2016 has seen about 5411 citizenship renunciations which is approximately 26% higher thanthat of  2015. This number has significantly increased in 2017 and 2018. Considering the number of applications and the backlog in processing the same the US government had increased the fees of renouncing citizenship by almost 400% to a $2350 in 2015.

Anyone indulged in No-willful violations of FATCA faces up to a $10,000 penalty for each year of non-filing, and willful violations of FATCA can face a penalty up to a 50% of the balance held in the FFI account or $100,000 whichever is higher at the time of the violation. The US government has the authority to change these figures as and when considered suitable.


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