Governments plan to step up information exchange to reduce tax evasion
One might imagine that foreign financial institutions wouldnâ€™t want to bother with the Foreign Account Tax Compliance Act (FATCA) right now. After all, the Internal Revenue Service just published another 400 pages of FATCA regulations, and these are still nowhere near the final set of rules. Think again. Governments are now players as well, apparently excited at the prospect of keeping an eye on everyoneâ€™s wealth.
The United Statesâ€™ FATCA regulations are intended to help combat U.S. tax evasion, but not just in America. Americans around the globe could find themselves caught in the complex and tangled web that is the U.S. tax system.
The proposed FATCA regulations include the announcement of a compromise between the United States and five European countries: the United Kingdom, Italy, France, Germany and Spain. This compromise will result in the creation of rules that will comply with the national laws of participating countries, by enabling governments in each country to collect data and then agree which data should be sent to and from the United States. This seems to signal a broad acceptance that global financial information exchange is a â€śgood thing,â€ť because itâ€™s, of course, intended to crack down on bad money being hidden in bad places.
An alternative argument thatâ€™s slowly emerging among more cynical wealth professionals is that creating such a startlingly complex volume of data collection and exchange is a deliberate effort to slow down the FATCA project. Following this line of thinking, the new joint agreement with five European countries becomes no more than a face saving exercise. The U.S. Treasury might now be able to blame foreign governments if FATCA becomes too difficult or slow to operate.
Candidly, FATCA has problems even though itâ€™s not yet up and running. There are no final regulations, thereâ€™s no agreement for financial institutions to sign up as yet and no guidance from several European countries on how they intend to collect the data that theyâ€™ve each now agreed to collect and share. There's equal silence within the United States as to how the federal government will collect data on European owners of entities in, say, Delaware to hand over to the United Kingdom, Italy, France, Germany and Spain. Online FATCA registration is due to open in January 2013 for millions of financial entities worldwide, yet the IRS has no software available and has not publicly announced what information financial institutions globally will need to provide or anything as obvious as a software launch date.
Truthfully, few of the issues over FATCA should matter to those who advise, hold or manage wealth. There are approximately seven million Americans living outside of the United States who, generally speaking, donâ€™t make a habit of keeping their money under their mattresses. Each of them must continue to file a host of annual U.S. tax returns and to report both their income globally and the places around the world where the money is kept (mattresses excepted!). Starting this year, the reporting is more complex than ever for many individuals, because a new personal FATCA form disclosing worldwide financial assets is now mandatory.
Responsibilities of Financial Institutions
Financial institutions globally will be required to study all of the complex new FATCA rules simply to find all relevant U.S. account holders who are account holders or investors. For financial institutions, thereâ€™s truly limited time today seeing that theyâ€™ll need to start registering starting in January 2013, systems permitting. While both Americans overseas and financial institutions globally will doubtless forever need to comply, the right thing to do is to be aware of the issues so that the right reporting goes to the right governments at the right time.