What is the Foreign Tax Compliance Act (FATCA)?
The Foreign Account Tax Compliance Act, or FATCA in short, is a federal law implemented by the US Government in 2010. FATCA aims to recognize all non-US bank accounts, assets, and investments owned by US citizens and taxpayers (this may include legal immigrants, NRIs, and green card holders).
FATCA requires all overseas institutions (Foreign Financial Institutions of FFIs) holding any assets belonging to US taxpayers to report them to the US Treasury Department so that tax can be levied on them. The individuals holding the assets are also required to declare these holdings in their annual Income Tax forms, which are to be submitted to the US Internal Revenue Services (IRS).
Who must comply with FATCA?
This law applies to all US taxpayers, as well as US citizens and green card holders residing abroad. It was passed in an attempt to weed out tax evasion by citizens who were making income from investing in foreign countries and holding their wealth in FFIs. Though not all countries have agreed to follow FATCA regulations, FFIs in countries that have done so are required to withhold 30% on any payments (withdrawals, loans etc.) to any accountholders who fail to comply with FATCA.
They are also advised to withhold tax on the individuals and immediately report them to authorities if they fail to cooperate at providing valid documentation. This measure was taken to identify any willful tax evaders attempting to shield their wealth by stashing it in offshore institutions.
FATCA works by compiling the data of all overseas assets held by US citizens and taxpayers by FFIs, who will then route them to the US Internal Revenue Services through their local government. For example, if an NRI has some holdings in an Indian Bank, the information of the account holder as well as on the assets held will be sent to the IRS through the government.
However, there are still 95 countries that have not complied with FATCA- but this does not mean that assets held here go unreported to the IRS. It means that there are no Inter-Government Agreements between these countries and the US, in which case information is compiled by complying FFIs and sent directly to the IRS without the involvement of the local government.
Controversy surrounding FATCA
This act has seen its fair share of controversy- especially people living abroad who were unaware of their US citizenship status and have been prosecuted for unknowingly not complying with the act. Since it was implemented, the renouncement of US citizenships by nationals or people holding dual citizenship settled abroad has seen an upwards trend- upon which the US government has levied a 400% hike in fees- prompted by the increase in processing of applications, which was causing backlogs in the system.
In 2014, an Intergovernmental body called the Organization for Economic Cooperation and Development (OECD) devised a system called Common Reported Standard (CRS) to increase transparency between FFIs and the governments of complying countries regarding individuals and assets. The system works by Automatic Exchange of Information (AEoI), which helps to share the personal information as well as information about the assets held by account holders internationally for reasons related to tax.
Around 90 countries, including India, have agreed to adopt the CRS system. This system has been compared to FATCA and was essentially nick-named GATCA (Global FATCA). The CRS system has proved to be quite useful for the FATCA system, making it easier for local governments to send information regarding overseas US citizens to the IRS.
The FATCA as well as the CRS have been criticized for possible breach of privacy of US citizens and transmission of their data without their will. The cost to compile and transfer the data to the IRS is also meant to be borne by the FFIs themselves, which led many of them to refuse to open accounts in the names of Americans, making in extremely difficult for them to make lives for themselves in these countries- leading to the renouncement of their citizenships or forcing them to return to the US.
The costs of implementation were also observed to be far more than the actual revenue raised by the IRS, which put the practicality of the act in question. It also increased the burden of the IRS greatly, which was found to not be very well equipped to process and handle the excessive assets of the US nationals.
Since the private data of many US citizens is being stored by FFIs, including their Social Security numbers and other personal details, it provided opportunities for scammers and fraudsters to obtain their information and perform identity theft- which also contributed to the closing of accounts in foreign banks by the US Nationals themselves. Both banks and US citizens seemed to suffer losses because of the implementation of FATCA, causing FFIs to begin to refuse service to American customers at all, despite there being Intergovernmental Agreements in place.
Conclusion
So, the question is- is the implementation of FATCA actually useful, or should it be repealed as per the demands of many US citizens holding assets abroad? Though it has proved chaotic in the short run, will the FATCA system actually help to detect and put an end to tax evasion being performed by overseas account holders, or should a better thought-out system be put into place? If enough pressure is put upon the US Government and the IRS by FFIs and US taxpayers, then this may be the case. But until then, all US citizens holding overseas accounts must continue to comply with the rules set by FATCA and pay taxes on these assets.
