Foreign Account Tax Compliance Act (FATCA)
The final version of the Foreign Account Tax Compliance Act was released on Jan 17, 2013 by the U.S Department of the Treasury and the Internal Revenue Service (IRS) in their efforts to combat tax evasion.
What is FATCA:
FATCA was initially introduced to target those who evade paying U.S. taxes by hiding assets in undisclosed foreign bank accounts. By signing up the Intergovernmental Agreement (IGA), government-to-government agreements entered into between the US and the partner country to establish a framework for foreign financial institutions to report certain account information to their local tax authorities, FATCA requires foreign financial institutions (FFI) to report to the Internal Revenue Service (IRS) information about financial accounts held by U.S clients/taxpayer worth more than $50,000, or by foreign entities in which U.S clients/taxpayers hold a substantial ownership interest.
Why FATCA is needed for U.S government:
Study shows tax evasion costs the U.S economy an estimated $100bn a year, in part due to individuals hiding income in foreign bank account. The U.S expects the Foreign Account Tax Compliance Act to raise $7.6bn in tax revenue for the IRS over a ten-year period.
Impacts on Overseas U.S resident and citizen:
For Americans living overseas, if the aggregate value of their foreign financial accounts exceeds US$10,000 at any point in time during the tax calendar year, they need to report their personal accounts through the . In addition to the long-standing FBAR form, FATCA has brought in a new IRS filing requirement, called Form 8938. The new form requires taxpayers to provide detailed information on their overseas financial accounts to the IRS, along with their annual income tax returns. U.S. citizens who have foreign financial assets in excess of US$50,000 are obliged to report through Form 8938. Failing to report could result in a penalty of US$10,000, and up to US$50,000 (for continued failure after IRS notification). Furthermore, underpayments of taxes attributable to non-disclosed foreign financial assets will be subject to an additional understatement penalty of 40 percent.
· Reduce foreign investment in the United States
· Punish Americans who work abroad bringing business to the U.S
· Set up a global financial fishbowl, with personal financial information shared among governments worldwide