Financial Translation Services Trusted by Tax Compliance Departments
Financial document translations play an important role in regulatory compliance. Today, few acronyms are hated as much as “FATCA”, short for the Foreign Account Tax Compliance Act. FATCA is not only creating problems for wealthy Americans trying to stash their money in secret bank accounts, but also for American citizens living abroad.
Foreign Banks
FATCA entered into law on March 18, 2010 as part of the Hiring Incentives to Restore Employment Act (HIRE). Perhaps its most striking component is how it manages to turn foreign banks and financial institutions (FFIs) into unpaid IRS agents.
FFIs will have to enter into a special agreement with the IRS by June 30, 2013 to participate in FATCA. Other FFIs face a 30% withholding tax on any payments from the US (dividends, interest, royalties or the proceeds of the sale of securities). FATCA goes far beyond the Qualified Intermediary (QI) regime, which remains in place.
FFIs will have to identify among their customers US citizens or entities in which US taxpayers hold a substantial ownership interest. In a second stage, they will have to report these US accountholders. If an accountholder is recalcitrant, the bank will withhold 30% tax on any payments of US source income or proceeds.
Although January 1, 2013 is D-Day for FATCA implementation, the IRS is phasing it in over a period of four years. In 2014, banks will have to start reporting account balances. Reporting on income begins in 2016, followed by a phasing in of reporting on gross proceeds in 2017.
A Global Tax Compliance System?
FFIs find themselves between a rock and a hard place. They must report to the IRS, but they are bound by privacy and bank secrecy laws at home. That is why the Treasury Department has negotiated with France, Germany, Italy, Spain and the United Kingdom to set up arrangements for government-to-government information sharing. This should make the FATCA pill easier to swallow for FFIs as they will largely be dealing with their own tax administrations that will get information from the IRS.
On July 26, 2012 the IRS unveiled a model intergovernmental agreement. There are two versions. The reciprocal version is for countries operating under an existing income tax treaty or tax information exchange agreement with the US. This provides for reporting by FFIs to their own tax authorities, followed by reciprocal information-sharing between national tax collection agencies. Reciprocal means the US will exchange information currently collected on accounts held in US financial institutions by residents of the partner country. Accordingly, the US will have to adapt its legislation to achieve equivalent levels of information exchange.
The nonreciprocal version is for all other countries with one-way information sharing from the host government to the IRS. Financial institutions in countries that have not signed either agreement will have to report American account holders directly to the IRS. As a side note, British MPs want a British version of FATCA to combat cross-border tax evasion by UK citizens. FATCA à l’anglaise seems to be the logical continuation of the EU Savings Directive and it may well forebode a worldwide FATCA.
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