FATCA: It’s Not Another FTA

Seeing FATCA associated with trade, the first assumption would be that the government has another free trade agreement on the table; however, there is nothing free about this acronym.  In fact, the act was designed to generate revenue. The Foreign Account Tax Compliance Act “FATCA” originally required businesses to collect tax identification numbers for vendors and submit documentation to the IRS when those vendors did more than $600 worth of business.  This turned out to be an administrative nightmare and was repealed; however, the international version of FATCA has not been repealed.

The portion of FATCA that remains will require foreign financial institutions to report certain information about financial accounts held by U.S. taxpayers to the IRS.  Starting in 2013, the foreign financial institutions will be required to

(1)  “undertake certain identification and due diligence procedures with respect to its account holders;

(2)  report annually to the IRS on its account holders who are U.S. persons or foreign entities with substantial U.S. ownership; and

(3)  withhold and pay over to the IRS 30-percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, subject to some additional guidelines.”  

Obviously, the foreign financial institutions are not pleased with the onerous reporting requirements.  These foreign institutions are likely to start denying accounts to U.S. persons to avoid the new reporting requirements. A U.S. citizen living and/or working in Italy may have difficulty obtaining credit or a banking services if the bank is going to be required to track and report information to the IRS.   Since implementation is still over a year away, it’s always possible that the U.S. will repeal this provision of FATCA too.