Anyone who is a U.S. citizen or green card holder (permanent resident) is subject to U.S. income taxes on all worldwide income whether living in the United States or abroad. It has been estimated that nearly $100 billion U.S. tax revenue was being lost due to tax noncompliance on foreign accounts.
1. What is FATCA?
The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 by Congress to target tax non-compliance by U.S. taxpayers with foreign accounts. Basically, FATCA requires foreign financial institutions, including banks and brokerage firms, to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest, and may require some income tax withholding.
2. How does FATCA work?
Under FATCA, foreign financial institutions must report account numbers, balances, names, addresses and U.S. taxpayer identification numbers or face a significant withholding of income tax on U.S. source income paid to them. Foreign entities must report the name, address, and U.S. TIN (tax identification number) of each substantial U.S. owner.
3. How far-reaching is FATCA?
FATCA affects a great many foreign entities, including foreign trusts, whether or not they are financial entities. In addition, the U.S. has developed model Intergovernmental Agreements (“IGAs”) for those countries that wish to have some input into how FATCA will affect to their entities. The latest figures from the U.S. Treasury indicate that more than 100 countries are in various stages of FATCA compliance: 58 countries have signed actual IGAs governing FATCA tax withholding and reporting for their financial institutions; 54 countries are still negotiating to put a formal FATCA IGA in place but have agreed in substance. Some of the participating countries are the United Kingdom, France, Germany, Denmark, Switzerland, Netherlands, Norway, Spain, Mexico, Bermuda, Canada, Cayman Islands, Australia, Japan and South Africa. But note that FATCA applies to nearly all foreign financial institutions regardless of whether their country signs an IGA.
4. How does FATCA affect an individual with foreign accounts?