On March 18, 2010, President Barack Obama signed into law the Foreign Account Tax Compliance Act (Fatca).
The Fatca was envisioned primarily to combat offshore tax evasion and recoup federal tax revenues. It enhances the ability of the US Internal Revenue Service (IRS) to detect tax evaders in the United States who hide their wealth in foreign accounts and investments.
Based on estimates, the US Treasury loses as much as $100 billion annually to offshore tax non-compliance.
The Fatca requires US persons to report their foreign accounts and other specified financial assets on a new form (Form 8938), which is filed with their tax returns if they are generally worth more than $50,000; a higher reporting threshold applies to overseas residents and others.
US persons include those with US passports, US addresses, US telephone numbers, US bank accounts, holders of US identifications cards, and those born in the US. Included in the definition are our overseas Filipino workers, American expats working in the Philippines, and Filipinos who are permanent US residents.
Fatca affects not only US taxpayers. It applies to foreign financial institutions (FFIs) which have, as clients or customers, US persons covered by the new law.
Examples of these FFIs are our banks, mutual funds, stockbrokers and trust companies.
The Fatca requires FFIs to report to the IRS about their clients considered as US persons.
FFIs that do not comply with Fatca will suffer a 30 percent US withholding tax on: (i) US sourced interest and dividend income (e.g., income from US stocks and bonds); (ii) gross proceeds on the sale of US stocks or bonds; and, (iii) up to 30 percent tax on foreign pass through payments.
Thus far, the US has been successful in getting the cooperation of several countries to help implement the law. France, Germany, Italy, Spain and the United Kingdom have consented to cooperate with the US on Fatca implementation, as have Switzerland, Japan and South Africa.
On the other hand, a top official of the People’s Bank of China, the central bank of the People’s Republic of China, has stated that “China’s banking and tax laws and regulations do not allow Chinese financial institutions to comply with Fatca directly.”
Locally, we have laws such as the Bank Deposits Secrecy Act, Foreign Currency Deposit Act and the Data Privacy Act that have to be considered by our government before agreeing to cooperate with the US.
Our affected financial institutions must consider the cost and burden that are attendant to complying with the Fatca.
Whatever their business decision will be, they have to start addressing it now to avoid the penalties arising from failure to comply with the Fatca.
(The author is co-managing partner and head of the Corporate and Special Projects Department of Accralaw. He can be contacted through felim@accralaw.com)