FATCA, or the Foreign Account Tax Compliance Act, is a tool by which the government will keep tabs on those placing money in foreign banks to avoid paying taxes on the full amount of their wealth. While some see this as a necessity, feeling that putting money in accounts over seas is unacceptable, some will see it as an intrusive measure by the U.S. government in getting involved into the legal affairs of sovereign states and as an invasion of privacy. Either way you look at it, FATCA isn’t going away.
The average taxpayer in this country doesn’t spend much time thinking on these things because it’s only a very small percentage of the population who have this kind of cash to move around. But the implications are actually quite far reaching and could affect banks and other foreign financial institutions globally, if they have clients in the U.S.
FATCA came about as part of the Hiring Incentives to Restore Employment (HIRE) Act which came into being in March of 2010. Its intent was to ensure the U.S. tax authorities would obtain information on financial accounts held by taxpayers, as well as foreign companies in which taxpayers hold a substantial ownership interest, at foreign financial institutions (FFIs). Failure by FFIs to report information would result in a requirement to withhold 30% tax on US-source income.
According to Emily S. McMahon, Acting Assistant Secretary for Tax Policy, “When taxpayers overseas avoid paying what they owe, other Americans have to bear a disproportionate share of the tax burden.” Therefore, McMahon says, “FATCA is an important part of the U.S. government’s effort to address that issue, and these regulations implement FATCA in a way that is targeted and efficient. We believe these efforts will serve as a complement and catalyst to the ongoing global efforts to combat offshore tax evasion.”
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