A matter of FATCA: Foreign Account Tax Compliance Act agreement with France
A record 1,335 Americans renounced their passports in the first three months of 2015. According to official US data, this staggering figure is close to 40% of the 3,415 Americans who gave up citizenship last year. A defiant act that, for many, stems from new banking laws tied into FATCA, which requires foreign banks to report to the IRS all accounts held by Americans.
In a step towards clamping down on those who evade US taxation by investing overseas, the Foreign Account Tax Compliance Act – or FATCA – was enacted in the US on March 18th, 2010, with an effective date of July 1st, 2014. The controversial bank account reporting requirements initially met with resistance from many governments overseas. But the Treasury Department has negotiated a series of intergovernmental agreements with the tax authorities of other countries, such as France, Germany, Spain, Italy, Switzerland, Austria, Sweden, Denmark, and Norway, allowing them to act as intermediaries before the information is forwarded to the US government agency responsible for the collection and enforcement of taxes.
There are two parts to FATCA: US taxpayers reporting of foreign assets and income on Form 8938 and the reporting of accounts by a non-US financial institution, otherwise known as a Foreign Financial Institution or FFI.
Having been around since the 2011 tax year, the new Form 8938, Statement of Specified Foreign Financial Assets, requires disclosure of certain foreign assets and financial accounts. This is filed with the federal tax return. Although Form 8938 resembles the dreaded FBAR – the Foreign Bank Account Reporting, which looks only at bank account information – certain other non-account assets, such as business arrangements, are disclosed on the FACTA form. Other requirements differ as well.
Form 8938 must be included in the tax filing if the total value of your foreign assets exceeds certain thresholds, which for those of us who live outside the US and Puerto Rico are as follows:
• More than $200,000 for single filers (or married, filing separately) or $300,000 for joint filers at the end of the year, or • More than $400,000 for single filers (or married, filing separately) or $600,000 for joint filers at any time during the year.
If you don’t otherwise need to file a tax return, then you are not required to file a Form 8938. But it is the second part of the form involving bank reporting that is resulting in a letter being sent to suspected US account holders requesting US taxpayer identification from FFIs.
FATCA generally requires an FFI to identify certain US account holders and report their accounts to the IRS. The US and France have reached an agreement whereby account holders would be reported to their country of citizenship. US persons having accounts with French FFIs would be reported to the US, as French nationals with accounts in the USA would be reported to France.
If an FFI does not enter into an agreement with the IRS, all relevant US-sourced payments, such as dividends and interest paid by US corporations, will be subject to a 30% withholding tax. The same 30% withholding tax will also apply to gross sale proceeds from the sale of relevant US property.
Certain FFIs have taken the route of certifying with the IRS that they have no American customers, and thereby do not need to comply with FATCA’s expensive and laborious reporting requirements. It is these financial institutions that have asked their US customers to go elsewhere, much to the shock of Americans living abroad.
It could be worse: your foreign bank accounts could be frozen (see box below).
In the meanwhile, FATCA has become a model for other countries. The Organization for Economic Co-operation and Development (OECD) is establishing the Common Reporting Standard (CRS) for international account disclosure. Some 44 OECD member states will begin to implement the CRS on January 1st, 2016, with reporting commencing in 2017.
There’s no escape
American-born Johnathan Weiss hasn’t lived in the US for 25 years.
“I’d been living in Switzerland for ten years, and then out of the blue I got a letter from my bank, saying that since I am an American citizen I had to file some extra paperwork. Two weeks later my bank account was frozen,” Weiss told The Local in Paris. “I had no idea what to do.”
With the help of tax professionals, it took three weeks to file the necessary paper work and provide the bank with a letter of certification to have his account unfrozen.
Now that Weiss understands the laws and what is expected of him, he says he’s is not resentful of the new regulations. But he does wish he had known earlier.
“It was scary,” he says. “People should be aware of FATCA and deal with it proactively so they don’t have to go through what I did.”
American Tax Consultant George Donnelly (www.donnelly-cpa.com – 06 79 27 92 60) is a Member of the American Institute of Certified Public Accountants, Licensed by the State of California.