FATCA: The large, unfriendly elephant in the room

  • Hungry: The US Internal Revenue Service

    Hungry: The US Internal Revenue Service


The Elephant called FATCA is now in the room. This elephant is large, unfriendly, and will brook no dissent. The FATCA programme* and the accompanying US tax compliance issues have been discussed on many occasions over the last few years in Moneywise, some references below.

The headline statement in The Royal Gazette on May 01, 2013, “FATCA Compliance could be costly”, from Premier Craig Cannonier, on the effects of FATCA on Bermuda and the accompanying comments made me want to exclaim as Tim Gunn of Project Runway is famous for, “People, You need to Listen up - where have you been for the last ten years?”

FATCA’s weaker sister, the Qualified Intermediary Programme, dormant since 1986, started the actively looming compliance issues in the year 2000 when Bermuda became one of the first Qualified Intermediary countries. The QI programme did not progress as desired, thus FATCA (the Foreign Account Tax Compliance Act) possessing more size and clout was passed into US law by the Hiring Incentives to Restore Employment (HIRE) Act on March 18, 2010.

FATCA requires non-US foreign financial institutions (FFIs) and non-US non-financial entities (NFFEs) to identify and disclose their US account holders and members or become subject to a new 30 percent US withholding tax with respect to any payment of US source income and proceeds from the sale of equity or debt instruments of US issuers (hereinafter referred to as Withholdable Payments).**

The FATCA programme is extremely complicated and not well understood, a fact demonstrated by the response section to The Royal Gazette article. One comment was made that the current Minister of Finance (MOF) Bob Richards did no one any favours by signing some agreement with the US government. Ah, no, this information is incorrect.

That Intergovernmental Agreement*** with the United States Treasury was in significant progress long before the current MOF was placed in charge. Moneywise wrote on December 08, 2013 on this very issue of individual account confidentiality, and the contemplated sharing of this information with the previous government.

The current MOF actually elected to leave the reporting and compliance of FATCA to cooperation between the foreign financial institutions, non-financial foreign entities and US Internal Revenue Service.

In a very broad sense, who may be affected by FATCA? Individually, specified United States persons: US citizens and green card holders resident in the US and living abroad who have foreign financial bank accounts, financial interests and other holdings, US residents for income tax purposes (these are individuals who do not have a US passport or citizenship but have resided in the US long enough to meet the substantial presence test), and others with US connections such US owned foreign entities. Foreign financial institutions (FFI) and non-financial foreign entities (NFFE) include all those that have US proprietary investments, US account holders, or US financial dealings.

How is FATCA cooperation encouraged and enforced? Bermuda (under the previous government) signed a number of Tax Information Exchange Agreements (TIEAs) in the last few years with the United States and other countries. TIEAs, tax treaties, and Intergovernmental Agreements all aid in mutual information exchange cooperation.

In cases where tax evasion, etc, is suspected or determined, the US Internal Revenue Service has profound regulatory powers (agreed on by the TIEAs and tax treaties) to request detailed significant confidential information on specified US individuals and related parties.

According to Bloomberg BNA May 01, 2013: “The Justice Department announced April 30 that a federal court in San Francisco has entered an order authorizing the Internal Revenue Service to serve a John Doe summons to Wells Fargo NA seeking information about US taxpayers with offshore accounts at FirstCaribbean International Bank (In re Tax Liabilities of John Does, ND Cal, No. 13-CV-01938, order 4/29/13).

The case is the latest development in the government’s ongoing efforts to identify taxpayers who hide assets offshore and the banks that help them and marks the government’s first public action against Caribbean banks……Naturally, the summons order has received significant attention worldwide.

For those of you have not heard of a John Doe summons, it is a legal procedure, a federal court order, sort of a fishing expedition (in a way) to find US taxpayers whose identity is unknown, but who are presumed to have circumvented US tax laws. These folks, if caught, are in the soup or rather in the sea since we are referencing the Caribbean financial jurisdictions.

Just a few weeks ago as well, the International Consortium of investigative Journalists released the largest investigative report in their fifteen-year history, some 2.5 million secret files on offshore accounts of more than 130,000 individuals and companies held in tax havens. The number of disclosures regarding highly placed politicians, wealthy individuals, executives and others has barely begun to be revealed. Already, the information is astounding.

A large dose of caution. Bermuda is not immune and will support the status quo in meeting the US tax authorities’ request for information. The window is closing. Foreign financial institutions are (will be starting to) report on US persons’ foreign accounts, including account activity and balances. It may be ill-advised to move accounts elsewhere as there is no elsewhere.

FATCA isn’t just the United States wanting their share of taxable income and financial reports. The United Kingdom, Europe, Australia, Canada, and other countries are looking for tax evaders hiding from their own country’s taxing authorities. The United States will reciprocate by reporting all foreign interest, dividends, investments, etc, held in the US financial institutions by foreign nationals to FATCA participating foreign governments.

For all those who were not aware that they may in non-compliance with US filing and reporting, it is not too late to take control of your finances and PLAN your financial future by becoming US tax compliant, if applicable to your situation.

You don’t want to be the missing link in the IRS match the accounts game. Then, you will really be in the sea also up to your neck.

Reference sources:

Bermuda banks set out to identify US account holders to comply with US clampdown. October 12, 2013 by Jonathan Kent interviewing the Finance Director of American Citizens Abroad organization and the author who is a member of ACA Professional Tax Advisory Council.http://www.royalgazette.com/article/20121012/BUSINESS/710129955

Rights and responsibilities of US citizenship http://www.royalgazette.com/article/20090704/BUSINESS/307049965

Will ‘pondstraddling’ get too ponderous for some? http://www.royalgazette.com/article/20090523/BUSINESS/305239976

*Detailed FATCA information direct from the IRS http://www.irs.gov/Businesses/Corporations/Summary-of-Key-FATCA-Provisions

**FATCA Alert http://www.dlapiper.com/files/Uploads/Documents/FATCA-Alert.pdf

*** Fatca: How comfortable are you with government having access to your personal financial information? http://www.royalgazette.com/article/20121208/COLUMN07/712089999

**** IRS Granted John Doe Summons to Identify U.S. Users of FCIB Account

Wednesday, May 1, 2013 from Daily Tax Report http://www.bna.com/irs-granted-john-n17179873705/

Martha Harris Myron JP CPA PFS CFP TEP is a Bermudian, and a cross border financial planning specialist / journalist. Her articles are published domestically and internationally, focusing on the challenging financial environment for local and international residents and their families living and working in Bermuda with connections across the pond in the North Atlantic Quadrangle: United States, Canada, United Kingdom and Europe. Inquiries to martha.myron@gmail.com

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Published May 4, 2013 at 8:00 am (Updated May 3, 2013 at 2:58 pm)

FATCA: The large, unfriendly elephant in the room

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