April 2014 | www.selectasset.com
What you need to know about FATCA and much more

You must have heard about FATCA by now. Free market lobbyists are up in arms, calling for an immediate repeal of the act. Ordinary citizens living abroad with modest offshore investments are nervous. Tax cheats are quaking in their boots. Some Americans are even renouncing their citizenship. While there’s a lot of smoke and hot air out there, it is important to know the facts and what’s required for those of us living abroad.

Today, about 7 million U.S. “persons” (including humans, trusts, companies, estates) reside outside of the U.S.A. However, only about 500,000 of them actually file annual tax returns. In an effort to recoup those taxes, and to address the U.S. government’s perception of widespread tax evasion, the U.S. Congress enacted the Foreign Account Tax Compliance Act (FATCA) in March 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. It requires individuals to report on their financial accounts held outside of the U.S.A. and for foreign financial institutions to report to the U.S. Internal Revenue Service (IRS) about their American clients.

“The risk of getting caught will only increase,” said Doug Shulman while serving as commissioner of the IRS through November 2012. According to The Jerusalem Post, Shulman basically confirmed that since the beginning of this decade the IRS has been on a mission to find and penalize U.S. citizens living outside of the country who are not filing tax returns, and perhaps hiding assets.

What’s required for those living abroad?

Before you get worried, here’s what FATCA means to you (assuming you are a U.S. citizen living abroad).  If you own foreign accounts or other specified financial assets worth more than U.S.$200,000 on the last day of the tax year and more than $300, 000 at any time during the tax year,  you must report them to the IRS using “Form 8938,” filed with your U.S. tax return.  For joint returns, the thresholds are doubled, respectively. Those who understate income of an undisclosed foreign financial asset could be slapped with a 40% penalty.  

For more detailed information, go to www.irs.gov, or better yet, talk to your accountant. There’s a very good chance you have no personal obligations to worry about, but it’s important to own up. Foreign banks and financial institutions have a much bigger headache, as they are required to enter an agreement with the IRS to identify their U.S. account holders and disclose their names address, account balances and more.

You may be asking, “Whatever happened to client confidentiality?”

Actually, to legally circumvent bank-secrecy laws, several countries have signed intergovernmental agreements (IGAs) with the IRS agreeing to trade information about account holders, and several other countries have issued statements regarding the implementation of FATCA. Currently, according to Felicia M. Seaton, a foreign attorney specializing in U.S. income-tax compliance, speaking in an interview with The Jerusalem Post online, some 50 countries are negotiating deals with the IRS.

According to latest data, countries that have signed or are in the process of approving IGAs with the U.S.A. to facilitate FATCA compliance are the  Cayman Islands, Costa Rica, Denmark,  France, Germany, Hungary, Ireland, Italy, Japan, Mexico, Norway, Spain, Switzerland, and the United Kingdom. Yes, Japan is on that list. No, China is not.

Seaton also suggests that the threat of criminal prosecution is quite persuasive. It was reported extensively last summer that 19 Swiss and Israeli banks based in Switzerland are currently involved in IRS investigations or criminal cases and 100 other Swiss banks that service U.S, clients are willing to settle with the IRS to avoid investigation.  

Switzerland is not the only country playing “Let’s Make a Deal.” According to Seaton, the UK has reached agreements with several countries for information exchange and Israel Tax Authorities announced at a conference earlier this year that discs containing account information were already being exchanged monthly.

US citizenship renunciations—the dark side of FATCA?

On the extreme end of the scale, there are claims that FATCA has driven some Americans to renounce their citizenship, strained foreign relations, brought about the possibility of capital flight and raised questions over its cost-effectiveness.

The Wall Street Journal reported that 2013 has already set a new record for "expatriations," defined as citizens renouncing their citizenship or permanent residents giving back their green cards. They quote tax lawyer Andrew Mitchel, who tracks the data, saying there have been 2,369 expatriations as of the end of the third quarter. That’s an increase of 33 percent over all of 2011, the previous high mark.

Why, would some Americans go so far as to sever their ties to the homeland? The short answer is that most of those expatriations are coming from people who had dual-citizenship and are simply seeking to avoid trouble with the IRS.

In 2008, according to Joshua Matthews, a co-founder of Maseco Private Wealth, when the U.S. government pursued and eventually imprisoned UBS whistleblower Bradley Birkenfeld, non-US-based financial advisers started to grow twitchy about looking after American expats and others living abroad with links to the U.S.A. And as the implications of FATCA came to light, namely the new workload and expense foreign banks encounter when they have American citizens as clients, American expatriates and permanent foreign residents are finding that their business is unwelcome in the U.S.A. and also in their adopted countries.

"What's happened is that U.S. companies have decided the reputational risk [of having expat American clients] isn't worth it," says Matthews.

Finding the silver lining in FATCA

On the other hand, some analysts see a silver lining to FATCA, in new opportunities for well-formed, international financial advisors.

“Financial advisers in the field have a real opportunity to step in and help, and at the same time increase their client base, by offering the kind of support that will help American expats to survive a post-FATCA world,” writes David Howell, for International Advisor, a monthly magazine specializing in cross-border products and tax advice. What kind of help?

“This means honing up on double taxation agreements, checking out the most efficient investment wrappers with compliant structures, setting up new partnerships and discovering U.S. qualified products to suit long term savings needs,” says Howell.

According to Howell, while some of the bigger players are saying good-bye to U.S. expats, there is an army of boutique wealth managers out there who are happy to extend a hand and fill the void of financial planning advice for those seeking an international approach to wealth management.

So before you rush off with passport in hand to your local consulate, talk to your accountant and meet with your financial advisor. Learn your requirements and your options. FATCA may just turn out to be a minor headache, but it’s good opportunity to reevaluate your investment position.