The 50 largest US companies alone have more than $1.6 trillion stashed offshore, avoiding around $600 billion in federal income taxes. And while the newly proposed tax plans by President Trump and Congressional leaders might eventually offer even more giveaways to the big corporations, there is the Foreign Account Tax Compliance Act (FATCA), intended to prevent the outflow of taxable assets to tax oases outside the US.
Technically, there is only one major country that taxes its non-residents on foreign earned income, and it is the United States, and under FATCA, financial institutions of the partner countries are obliged to forward information on accounts held by American citizens to the US tax authority (IRS).
Currently, nearly 100 countries have FATCA-related Intergovernmental Agreements (IGAs) in place with the United States. Where a Model I agreement allows Foreign Financial Institutions within the country to report to the local country authority, which will then provide the information to the IRS, while under a Model II agreement, the FFI would directly report to the IRS.
And last year, the IRS has announced that those agreements have led to the exchange of financial information regarding US taxpayers with 177,147 financial institutions in more than 200 sovereign nations and legal jurisdictions, including tax havens and notoriously difficult countries like China, Iraq and Russia.
The far reaching high compliance rate is a no surprise, considering that non-compliant institutions are cut off from access to critical financial markets, and furthermore, 30% of the amount of any withholdable payment (interests, dividends, remunerations, wages, compensations, periodic profits, etc) are deducted and withheld from them as a tax penalty. Institutions that agree to the law must annually report the name, address, and tax identification number of each account holder that meets the criteria of a US citizen; along with his account balance; and any deposits and withdrawals on the account for the year.
FATCA is intended to make banking worldwide transparent, and while the price to pay for not complying is high, the compliance costs are also lofty, resulting in some large banks limiting the services offered to American citizens and investors.
In order to strengthen information reporting and compliance of financial institutions worldwide, a Common Reporting Standard (CRS), developed by the Organisation for Economic Co-operation and Development (OECD) as an information standard for the automatic exchange of tax and financial information on a global level, has up to today been signed by more than 100 countries, with nearly half of them committed to start reporting in September this year, while the other half joining the information exchange in 2018.
With all IGAs and measures enacted, the implementation of FATCA is far from seamless and its future – far from stable. For example, last year the IRS estimated that its costs to implement the law would be greater than the revenue generated by it, the US Treasury has been slow to provide guidance, and full implementation of some parts of the law has been delayed for 2019, the law has forced thousands of Americans to give up their citizenship, and the possible enacting of recent tax reform proposals and the strong indications from the Republican Party lawmakers that they want to see the FATCA repealed, make its future controversial.
Despite all recent criticism, FATCA plays a critical role in detecting international tax evasion, and future global efforts would most likely be placed behind reforming it, rather than repealing it.
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