Background of FATCA

There is no doubt that the US is the world’s biggest economy. They are working harder each day to keep an indirectly proportionate relation between the inflow and outflow of the capital. In order to maintain this flow of capital post one of the biggest recessions of all times in 2007-2008, the country had to rebuild itself and its people. A plain introduction of an Act to hire more employees and provide more employment needed some backing up with the capital that was being rounded off by the recruiters.

Once what was neglected for the long run, the government realized that one major source of income would be the repayment of taxes by all US citizens. Although it is not illegal to operate on offshore accounts, the US considers nondisclosure of accounts illegal and applicable to all US citizens. For years, tax evasion was ignored by the government in the running to becoming one powerful country, globally. However, uncertainties are meant to not be predicted.

Post the subprime mortgage crises and collapsing of some of the biggest financial institutions like the Lehman Brothers, it was a clear path to recession. Under the presidency of Barak Obama, one act was passed that moved every human born in the land of the States. Now for FATCA, it was just a chapter to bring the law in motion. Hence, not the act but the additions to that act moved the green card holders across the globe.

What the HIRE act states is pretty clear. It would aim at increasing the employment scenario across the nation post the financial and economic breakdown of the country. Certain tax benefits were provided to the employers which could be listed out as one, a payroll tax exemption, and second, a business tax credit. Ideally, the employer is entitled to pay their share of 6.2% on the share of social security tax on the wages paid to the employee. However, this Act stated that any employer who hired an unemployed worker between February 03, 2010, and January 01, 2011, would be exempted from this tax. This was not a deal the government proposed forever and hence, it would be applicable to the wages paid between March 19, 2010, and December 31, 2010. When it comes to the second benefit, it is interrelated to the former benefit. Here, if the employee is retained for 52 weeks, the business would be eligible for general business credit. Fairly known as the new hire retention credit, the 6.2% of wages paid to each employee would be repaid for a maximum credit of $1000 once the income tax returns would be filed in the year 2011. Since the goal was to put all the Americans back to work as soon as possible, this Act had to be implemented in a breath. The concerns were then raised regarding the generation of funds whilst cutting out such prominent resources. Not only did these benefits mean the tax inflow would reduce, but it also meant that the credits had to be provided within 52 weeks. Post-recession, the generation of such a big amount would be a task and hence, the government reached out to their overseas taxpayers.

No doubt there were sincere taxpayers abroad, however, the count was still low when compared to the number that once flew out and did not come back. As an administrative tool for the Internal Revenue Service, a few sections were included in Code Chapter 04 of this Act, Section 1471 – 1474. The core purpose of this was to generate income in order to balance the flow of capital generated through tax.

If the employers had relaxed tax policies, who was going to fill the gaps? Hence, the then untouched resource of offshore US citizens was targeted. All the US citizens were obligated to pay the tax even when they were living abroad. This law required all the taxpayers to report their assets held abroad, annually. Once these internationally held assets are taxed, the revenue for providing incentives and stimulating jobs as possible. Now, who all would these laws be implicated, one wonders? The government states that anyone holding accounts that exceed assets worth $50000 or more in a year is required to pay the penalty.

The next question rose was, who does one keep a track of all these account holders? The IRS – Internal Revenue Service, asked all the Non-US Foreign Financial Institutions (FFI) and Non-Financial Foreign Entities (NFFE) to comply with the law. These international institutions were asked to disclose any and all identities of the US citizens along with their assets held in their banks. They are asked to submit their findings to IRS or The FATCA Intergovernmental Agreement (IGA). All the institutions that do not comply with the law, were asked to pay a 30% tax on the withholdings and along with their customers applicable to do the same. On top of that, they would no longer be a part of the US market as a penalty for noncompliance.

With every action comes a reaction and a similar ordeal faced by the US government. For many, it was an unnatural experience being asked to pay the tax in a country they no longer live in. They were not associated in any means but only owning the green card that made them obligated to pay an amount annually now. Amongst the many objections, one was where FATCA was said to have “wreaked havoc on the global financial system.” It not only violated the sovereignty of the countries asked to comply with the law but even affected global and American economies. It even made the process of opening an account in a foreign country a nerve-wracking task. This is so because they were unsure if the account opener is legitimate or just trying to get away from paying tax. It even meant that if the bank had no US citizens, they would now be responsible for this one account holder and his payment to the US. Another observation released the acknowledgment of real stress on the FFIs and not the individuals. They would be banned from the US market, aka, one of the biggest and strongest financial markets globally. Also, if they don’t comply, customers would not enroll with the fear of being eligible for the tax paid for nothing. Since it does make sense economically, the criticism did not impact the implication of this law.

There are certain reasons why the US would keep FATCA in existence.

1. Offshore tax non-compliance is tackled by FATCA

The US had been losing out billions of dollars because of the evasion of tax by the offshore residents. Hence, the revenue generation would drastically be increased and lawfully, no one could question it. If this would not have been undertaken, the government would bound to increase the taxes paid on other commodities, which would not even have been recognized so much politically.

2. Already implemented

There was a criticism that it would be a task to implement the FATCA system with respect to the cost and its complexion. The existence of its base was laid a couple of years ago when policies like KYC were introduced for a better understanding of the customer by the banks. Hence, the task of identification would not be as difficult as one presumed it to be. Further, all the financial institutions had already grown enough to be capable to match the complexities served by the law.

3. Previous tax requirements in FATCA

It was not a burden that was laid by the government but severe actions are taken on things that were highly neglected by people otherwise. This could be simply explained as the offshore citizens have always been expected to file their ITR with the government and inform them about their assets holding. However, since it was not very strictly followed, a separate name has been given with a set of regulations to write off all the evasions. It could be called a steep penalty for people who did not comply with the law all this while.

4. The global trend of financial transparency

If one happens to repeal the law passed, it would make them have a questionable appearance in the market. While on one hand, there would be global support for something that helps to maintain clean records and tracks of the money flow and assets holding, on the other hand, individuals would attract suspicion by not complying. Hence, having a Common Reporting Standard with the outlook of stepping into a transparent future would yield acceptance than taking a step back and going against more than 100 participating jurisdictions across the globe.

Thus, to acknowledge this smart move by the US, Robert Bridson, FS tax partner at PwC, rightly made a statement saying, “Politically it was an easy sell – foreign institutions bear the costs and the US government gains information and revenue. If FATCA didn’t exist, the tax bill for US residents would potentially go up, which would not be popular.”
The above statement clearly highlights another aspect of the position of the US globally, it grows on the expenses of others and yet, gets hefty returns out of it. The major cost is eventually borne by the countries that comply or not. Either way, they are subjected to pay the United States in one way or the other.