If you follow our US Taxes Explained series, you are probably familiar with how the IRS and other US government agencies are consistently increasing initiatives to catch up with delinquent on US taxes, especially those with assets overseas. The Economist describes one such initiative, the Foreign Account Tax Compliance Act (FATCA), in their recent article “Scratched by the FATCA.”
Taxpayers should be aware of the FATCA and how it will affect both their US taxes and their investments overseas.
What is the FATCA, and How Will it Affect Me?
The FATCA is in place to ensure that foreign fund managers will report information about their American clients to the IRS, or face steep withholding US taxes. This is to make sure individuals report income on their US taxes. To ensure that the information is accurate and complete, there are certain details that must be provided to the IRS about their American clients. In the event that a fund manager is unable to provide the required details, they will still be affected by the steep withholding taxes.
There are some problems that arise regarding these filing requirements.
- By reporting their clients’ information to the IRS, the fund manager could very well be in violation of their own country’s data-protection laws.
- In many cases, there are intermediaries between fund managers and their clients — they may have American clients and be unaware of it or unable to gather the necessary information.
- The fund manger’s clients may be unresponsive or unwilling to provide the necessary information that is required to be filed with the IRS.
If fund managers were previously aggravated by their American clients’ US taxes and how it affects their investment options, you can imagine how aggravated they will be now that the reporting requirements have been passed along to them.
Why Would Foreign Fund Mangers Comply with the IRS?
Undoubtedly, many people are going to question why foreign fund managers would agree to comply with the regulations set forth by another country’s tax authority, since many of them do not have direct ties to the US and thus have no filing requirements for US taxes.
“The law requires that foreign financial institutions (a category that seems to include everybody from financial advisers to pension funds) register with the Internal Revenue Service by June 30th 2013. If they do not register, they will then be regarded as “non-participating”. In that case a 30% withholding tax will be applied to all their income on American assets from 2014 as well as to the proceeds from the sales of these assets from 2015.”
The American equity and bond markets are also the biggest in the world, making many fund managers feel obligated to register. Making things more complicated is the fact that the withholding is charged against the fund manager, not the American clients. Therefore, the fund managers are going to be liable for any penalties assessed for not reporting the necessary information about American clients, no matter the fund manager’s nationality or which country they operate from.
How Can Americans Invest Abroad?
“If the process is not made simpler or less costly, fund managers may be forced to take drastic measures. One approach would be to bar Americans from investing in their funds, or to require them to own separate classes of shares.”
If FATCA goes through unchanged, there are few options that fund managers are going to have when it comes to dealing with their American clients, their US taxes and the IRS reporting requirements. There are some aspects (including some of the most costly provisions) that are yet to be agreed upon by Congress. International fund managers are hopeful that these details will allow them to continue to deal with their American clients without having to face steep withholding taxes or deny their funds to American clients.
Another potential solution is having foreign fund managers avoiding American assets for all of their investments. While doing so may seem ridiculous, the reporting requirements that the IRS has in place may be impossible to satisfy, leaving fund managers no choice.
Additional Information about FATCA and US Taxes
Have a look at our post on the compliance requirements of FATCA for your US taxes. If you have other questions about FATCA or would like to learn about our expat tax services, please contact us.