Friday, November 21, 2014

The Truth About FATCA and Its Impact on US Citizens Abroad

By Christian Reeves

Foreign Account Tax Compliance Act is finally here and you can be sure that the impact of FATCA will be severe. This brief article considers the impact of FATCA on Americans living, working, or investing overseas.

FATCA is founded in a U.S. tax code that attacks small business and lavishes tax holidays on the wealthy (tax inversions, for example). It came about because America is the only large economy which taxes its citizens on their worldwide income. We are the only country that forces our citizens abroad, including those who are residents of another country, to
pay tax at home.

In to this system comes FATCA. It basically turns bank tellers at foreign institutions in to unpaid IRS agents. The first impact of FATCA is to require all foreign banks to determine which of its clients are U.S. persons and to report all of their transactions to the IRS.

The problem is, proving someone is a U.S. person for tax purposes is tough. Of course, anyone with a U.S. passport is caught. But the law also tags those who spend 183 days a year in America. It expects the banker to determine who has “other substantial ties” to the United States and thus might be subject to income tax here.

If the banker fails to report, the bank will lose its ability to work with any U.S. banks, correspondents, and U.S.-based companies. While FATCA says U.S. banks must withhold 30% of all transactions going to non-compliant banks. This is unsustainable and means the offshore bank is effectively blocked from all U.S.-based transactions. Banks that don’t sign up are pushed out of the worldwide system.

The next impact of FATCA is to outsource tax compliance and policing to foreign banks. The law puts the onus on bankers and tellers to ensure everyone around the world is paying Uncle Sam. These people might have no understanding of the U.S. tax system, or the intricacies of our law, but they become the gatekeepers. And, if they fail, the costs to their employer will be swift and severe.

As an expat myself, the most direct impact of FATCA in my life is that very few foreign banks will to have anything to do with me. We 7 million Americans abroad now wear a scarlet letter A which causes most bankers to turn up their noses when we enter the room.

The majority of banks, brokerage firms, insurance companies and mortgage lenders are now closed to U.S. persons. Where it was once tough to get a loan or open an account, it is now nearly impossible. Those banks that are open to us charge hundreds of dollars in extra fees and offer lower returns on investments than they did last year. This is done to recoup the hundreds of thousands, or even millions, of dollars they were forced to pay out to set up compliant systems.

The most notable unintended consequence of FATCA is that many foreign companies are now hesitant to hire U.S. expats. It is becoming more and more difficult to find a job outside of our borders. If the employer doesn’t already have American workers, they won’t want to deal with the risks and paperwork.

Having U.S. employees also comes with banking risks. The employer will be depositing money in to an American’s account, be it onshore or offshore. This might trigger FATCA reporting by the bank on the company, bringing with it attention and problems they don’t want.

The impact of FATCA which garners all of the headlines is that record numbers of Americans are giving up their citizenships and passports. In fact, the latest numbers show that expatriations have quadrupled in anticipation of FATCA.

* If you renounce your citizenship and provide your bank with a letter from the U.S. State Dept. confirming expatriation, FATCA no longer applies. Though, you must go through a lengthy process and audit to receive that letter. You will find a number of articles on giving up your U.S. citizenship and obtaining a second passport on this site.

Christian Reeves, JD, MBA is publisher of and can be reached at compliance with ever changing U.S. laws.

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