REGULATORY INITIATIVES
The Foreign Account Tax Compliance Act:
Stay tuned to see its effects
T
he U.S. has had a long history of trying
to stop tax evasion by its citizens and
residents who use foreign accounts
with only limited success. A highly sophisticated offshore industry, comprised of financial
professionals, bankers, brokers, corporate
service providers, tax attorneys, accountants
and trust administrators, advise and assist
Americans on opening offshore accounts and
concealing assets in order to avoid taxes and
creditors in their home jurisdictions.1
Congress has estimated that every year the
U.S. loses nearly $100 billion in tax revenues due to offshore tax abuses.2 On March
18, 2010, Congress passed broad-sweeping
legislation called the Foreign Account
Tax Compliance Act (FATCA) in an effort
to combat offshore tax dodging by “U.S.
persons,” including U.S. citizens or residents
of the U.S., privately held corporations, partnerships and estates. While most of its effects
do not take place until after December 31,
2012, FATCA has such an onerous effect
on foreign financial institutions (FFIs) that
choose to do business with “U.S. persons”
that these institutions need to start preparing
for it as soon as possible.
In general, it creates a complex withholding
regime designed to penalize FFIs and foreign
entities that refuse to divulge the identities of their U.S. clients. While there have
been many investigations into offshore tax
abuses, the Act comes on the heels of two
large recent tax scandals, one involving the
LGT Bank in Liechtenstein and one involving
UBS in Switzerland. It also comes at a time
when the U.S. has given large subsidies to the
banking sector and when the country, due to
a huge deficit, is badly in need of more tax
revenue. This article will provide some background on the existing legislation, briefly
describe FATCA, raise some outstanding
questions and concerns and set forth some
steps that foreign FFIs can take immediately
to ensure they are prepared to comply with
the Act by 2013.
Background on stopping tax evasion
In 2001, the U.S. government established the
Qualified Intermediary Program (QIP), the
existing legislation dealing with tax evasion.
It encouraged (but did not require) FFIs,
known in the legislation as Qualified Intermediaries (QIs), to sign an agreement with
the IRS to act as U.S. withholding agents
and comply with