Foreign Account Tax Compliance Act (FATCA), a U.S. law designed to uncover Americans stashing away money in secretive foreign banks, took into effect on July 1.
Passed by the Congress in 2010, at the height of recession, the FATCA requires foreign banks to report U.S. authorities about all offshore accounts held by American citizens.
The United States is the only large economy that taxes its citizens on everything they earn overseas. Many analysts have criticized the law, but the U.S. government has defended saying that the FATCA would increase compliance by U.S. taxpayers rather than to enforce collection from foreigners.
According to reports, more than 77,000 financial institutions in more than 70 countries have agreed to pass information to the Internal Revenue Service (IRS). Anyone – funds and financial institutions or banks – ignore to report assets held by American clients will face a ruinous 30% withholding tax.
It seems the United States started framing such a stringent law after it found hundreds of Americans hiding money in two Swiss banks – UBS and Credit Suisse. But some analysts say the measures came after significant pressure from the OECD and the G20 for Panama and the Cayman Islands to show more financial transparency.
Starting today, even banks in Luxembourg and other known tax havens may have to turn over account names and other data to US financial authorities.
Upon receiving the data, US authorities will tax the unreported income. It has been estimated that the U.S. Treasury loses as much as $100 billion annually to offshore tax non- compliance. Therefore, supplementing the reporting regimes already in place was deemed to be an effective means of increasing compliance and raising government revenue.
If proved successful, analysts say, many developing nations would also consider introducing similar laws.
The law has already frightened some Americans living abroad, with thousands of citizens giving up citizenship to avoid rigorous paperwork. Nearly 7 million Americans are living abroad and American businesses have operations in almost all corners of the world.
Under U.S. tax law, U.S. persons are generally required to report and pay taxes on income from all sources. The term ‘US persons’ includes US permanent residents regardless of where they reside.