The U.S. government, in cooperation with foreign jurisdictions, is making it tougher for taxpayers to stash money in “offshore accounts” and similar hiding places without meeting their tax obligations.
Alert: Under the Foreign Account Tax Compliance Act (FATCA), financial institutions in foreign countries are required to report information about holdings by U.S. taxpayers.
The law generally takes effect on July 1. If a foreign entity doesn’t comply with FATCA, or is otherwise exempt, it could be socked with a new tax penalty.
The United States has arranged intergovernmental agreements (IGAs) with 26 foreign countries. In addition, Uncle Sam recently announced that it will treat another 19 countries as having signed IGAs in principle. They will be afforded the same treatment through the remainder of the year as the other countries that have signed IGAs. (IRS Announcement 2014-17)
Here’s the whole story: FATCA was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010. It is intended to facilitate reporting of assets held in foreign banks often touted as “safe havens” that avoid U.S. taxing authorities. FATCA requires foreign financial institutions to report information about accounts held by U.S. taxpayers directly to the IRS, in addition to reporting data for accounts at foreign entities in which U.S. taxpayers have a “substantial ownership interest.” If the bank doesn’t comply, it may be assessed a 30% withholding tax on certain U.S. source payments, whether or not the recipient is a U.S. taxpayer.
The law has been a lightening rod for controversy because some foreign countries and disgruntled taxpayers claim that it violates privacy and banking secrecy laws. Traditionally, wealthy individuals have kept assets hidden from prying eyes in well-known havens like Switzerland and the Cayman Islands.
Now the U.S. government says that preferential treatment will be granted to jurisdictions that reach agreements in substance before the July 1 deadline if they consent to having the status of their agreements disclosed. It is also giving the financial institutions in these foreign countries 10 extra days to meet the registration deadline. With 19 more countries now being treated as if they signed IGAs under this arrangement, a total of 45 foreign jurisdictions will have agreed in substance to comply with FATCA (see below).
Not quite a top 20
A total of 19 countries have agreed in principle to FATCA and thus will be treated as having an IGA in effect for 2014. They are, in alphabetical order:
British Virgin Islands