Offshore Banks And FATCA Compliance

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A friend living in Thailand wrote this week to tell me about a rumor going around in Chiang Mai. Word on the street is that the IRS is checking up on banks in that city to confirm their FATCA compliance.

At this point, banks worldwide aren’t required to be sending account information for every account held by an American. They are required to be preparing to hand over relevant account information to the IRS. Further, the number of Americans with bank accounts in Chiang Mai can’t be big enough to warrant such close scrutiny. If IRS agents are roaming around town, I’d guess they’re there for some other reason…maybe a government-sponsored vacation.

However, as FATCA moves into the final stages of authority, we should expect the IRS to begin looking closely at foreign banks to confirm that they’re providing the information on American account-holders required under the regulations…and, if not, that they’re paying the associated fines for being noncompliant.

Yes, the IRS intends to fine foreign banks it decides aren’t going along with its FATCA regulations. An outrageous but not a new idea. Earlier this year, the IRS managed to get Credit Suisse to plead guilty to helping Americans evade taxes and to pay a fine of US$2.6 billion in retribution. Of that, US$1.9 billion goes to the federal government, the rest to the State of New York. That US$1.9 billion is about 15% of the IRS’s total budget for 2014. It will go a long way toward covering the cost of implementing FATCA (not to mention paying for a good number of government-sponsored vacations to Thailand).

What will FATCA cost? The global cost of compliance is too big to try to process. The U.S. government has yet even to provide a full estimate of the cost to the IRS to implement and manage its side of this equation. It is very possible that the cost to the U.S. government of setting up and managing FATCA will be greater than the revenues it will generate.

What revenues will it generate? The Congressional Joint Committee on Taxation has projected that the additional taxes collected from Americans as a result of the FATCA reporting rules will be US$8.7 billion over the next 10 years. Noncompliance fines and penalties from foreign financial institutions and individuals will be on top of that.

That’s the real upside for the IRS. From the individual taxpayer’s perspective, the challenge is understanding the rules. It’s hard to comply with something you can’t follow.

It’s not you. The whole financial world is confused by FATCA. Many banks are responding by zealously over-complying, making it ever-more difficult, as I’ve been reporting, for an American to open a bank account overseas or even to hold on to the accounts he’s got.

One reader wrote in recently to ask if she needs to complete FINCEN Form 105 when wiring the funds for a piece of property she is investing in overseas. The answer is no, as FINCEN Form 105 is for moving physical currency across a border. This is the form you want if you’re carrying more than US$10,000 in cash in or out of the United States. Fill it out and give to U.S. customs.

No form is required when wiring money out of the United States. FATCA changes nothing from a practical point of view—at least not for you. You provide your bank with the wire instructions for the recipient bank. The burden is not on you but on your bank to file the necessary paperwork.

What you do want to do, though, is to clarify, before sending the wire instructions, whether the recipient bank qualifies as FATCA-compliant. If it’s not, the bank sending the wire will do something in addition to filing the required paperwork; it will withhold 30% of the wire amount. You will, like it or not, have the privilege of giving the U.S. government a loan of that 30% until you file your next tax return and ask for it back.

To date, no one I know has been subjected to this 30% withholding when sending a wire overseas. However, again, banks aren’t yet required to send in account information. They have a window until the end of the year to get their compliance systems in order.

If you’d like to confirm that the receiving bank where you’re wiring money is on the IRS’s FATCA-compliant list, go to this webpage, where you’ll find a long list of foreign financial institutions registered with the IRS, including banks but many other groups being grabbed in this net, too. The page for Belize, for example, shows only a handful of banks (only 11 banks are registered in the country) but 240 registered financial institutions including local credit unions, trust companies, etc.

Lief Simon offers offshore advice in his free twice-weekly Offshore Living Letter and the monthly Simon Letter.  

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About Author

Lief Simon

Lief Simon has lived and worked on five continents and traveled to more than 60 countries. In his long career as a global property investor, Lief has also managed multimillion-dollar portfolios of rental properties, for others and for himself. He offers advice on international diversification in his twice-weekly Offshore Living Letter and monthly Simon Letter dispatches.