ON 27 October 2009, Democratic Congressmen Charles Rangel and Richard Neal introduced a bill in Congress with the goal of strict implementation of U.S. tax laws extending to assets outside the U.S. in order to minimize a perceived massive U.S. tax evasion. The Foreign Account Tax Compliance Act, FATCA, contained one, very simple requirement: foreign financial institutions wanting to do business in U.S. investments should be subject to similar reporting requirements as U.S. financial service providers.

On 19 March 2010, The House and Senate, respectively, each passed different acts, which were ‘resolved', within a couple of hours, by the House-Senate Joint Conference Committee into one, ‘new', 2049 page law that I venture to guess, not one member of either the House or Senate even bothered to look at (because there were inclusions in what was passed that were not in either the House or Senate legislation!) that was then passed, again, by the House and the Senate and signed into law by President Obama, that very same day. It is now known as the HIRE – FATCA Act. It is a ‘combination' tax and employment creation legislation. We are obviously concerned, though, with the tax aspects of the new law, which, in effect, is going to be an absolutely enormous challenge (nightmare is more like it!) to the approximately 200,000 financial services providers (including banks, insurance companies and investment funds) around the world.

The following is a summary of HIRE_FATCA, signed into law on 19 March 2010. The tax portion of this law, FATCA, stands for the Foreign Account Tax Compliance Act of 2010. This bill will now:

+ FATCA imposes a withholding tax of 30 percent on all payments flowing out of the U.S. to foreign financial intermediaries (the banks, insurance companies and investment funds). It obligates these institutions to automatically report accounts that these institutions manage for U.S. persons or corporations owned by these persons, not just for interest, dividends and similar types of proceeds but for all sales of stocks and bonds, as well. It requires foreign financial institutions to enter into an agreement with the IRS pursuant to which they would be required to provide the identity of U.S. individuals or foreign entities with ‘substantial U.S. owners' (ie U.S. persons owning directly or indirectly more than 10 percent of the foreign entity) that maintain financial accounts, provide relevant account information, comply with verification and due diligence procedures, and report annually certain information to the Treasury or face a 30 percent withholding tax on ‘withholdable' payments. Those U.S. 1099s that you've received from your US bank or brokerage at the end of each year are now going to be required to filed by the foreign institution, as well. Failure to do so will subject them to a blanket 30 percent withholding from all their U.S. investments;

+ FATCA defines ‘withholdable' payments to include not only fixed and determinable, annual or periodical (FDAP) income from U.S. sources, but also gross proceeds of sales of any income-producing assets from U.S. or foreign sources;

+ FATCA will permit withholding agents (a person or institution with a social security number, employer identification number or taxpayer identification number – numbers never previously required to be submitted) to rely on certification provided by an account holder so long as there is no reason to know (rather than having no actual knowledge) that the information is incorrect. Whether this ‘burden of proof' will have to be ‘explained' to the IRS is yet to be determined;

+ FATCA now requires non-financial institutions (not just the banks, insurance companies or investment funds – other corporate entities, as well!) to provide withholding agents with the name, address and tax identification number of any U.S. individual with more than 10 percent ownership in the firm or face a 30 percent withholding tax;

+ FATCA eliminates favorable tax treatment for bearer-bonds marketed to offshore investors, and no longer allows the issuance of bearer bonds by the U.S. government or for U.S. persons to hold bearer bonds;

+ FATCA ‘reinforces' FBAR provisions and imposes penalties as high as $US50,000 on U.S. taxpayers who own at least $US50,000 in offshore accounts or assets but fail to report the assets on their individual income tax return in offshore accounts or assets but fail to report the assets on their annual income tax return;

+ FATCA levies a 40 percent penalty rather than the usual 20 percent on the amount of any understatement attributed to undisclosed foreign assets;

+ FATCA extends from three years to six years the statute of limitations for ‘substantial' omissions of income exceeding $US5,000 attributable to offshore assets; Potential omissions of income presumably can come from any source outside the U.S. that are not reported on any U.S. tax filing;

+ FATCA requires shareholders in passive foreign investment companies to file annual returns if there are either U.S. investments or U.S. investors involved;

+ FATCA makes it easier for the U.S. Department of the Treasury to presume that foreign trusts have U.S. beneficiaries, and establish a $US10,000 minimum failure-to-file penalty for certain foreign-trust-related information returns. U.S. persons owning 10 percent of more in Foreign corporations fall under the provisions of this section of the new law and the IRS has actively been issuing $US10,000 penalty letters in this area for the past year. The innocent are now presumed guilty, in advance, and have to establish their ‘innocence, first, because of this legislation;

+ FATCA subjects dividend equivalent payments included in notional principal and similar types of contracts that are paid to overseas corporations to the same 30 percent withholding tax levied on dividends paid to foreign investors.

The Swiss-American Chamber of commerce estimates that the average bank is going to have to spend anywhere between $US 5 – 10 million to implement a 1099 reporting system to be in compliance with FATCA requirements. What do you think? I think that there are going to be many banks and insurance companies around the world that are simply going to tell their U.S. passport holding clients, clients who, in many instances, have been with that bank for years, that they are no longer welcome. I also think that there are going to be many banks that will simply ignore FATCA because they have no financial dealings with the U.S. We might very well be going into an era of ‘speakeasy banking', where old, distinguished financial institutions outside the U.S. are now going to be considered ‘rogue' institutions by the IRS!

The level of detail with which foreign financial intermediaries (are accountants and attorneys representing and preparing tax returns for U.S. persons or corporations also going to fall under that ‘FFI' umbrella?) are now going to be required to report in order to ensure that truly all US taxpayers must have 1099s far exceeds what has normally been considered anti-money laundering standards. Can the US enforce this? Of course they can…..but at what cost? There are far more problems than have yet to be thought out because of this legislation and all U.S. tax filers as well as foreign financial intermediaries had best be aware of this stupendous can of worms!