On July 14th, the IRS held a public hearing for the debt-equity rule (section 385 of the IRS code) that the Treasury Department proposed last April. The hearing, which had as many as 16 speakers from various industries,...
- The Tax Policy Blog
- Overreaching: Time to Reconsider FATCA
Overreaching: Time to Reconsider FATCA
The Foreign Account Tax Compliance Act (FATCA), part of President Obama's HIRE Act of 2010, was intended to ensure that U.S. citizens pay taxes on their foreign account investments. As The Economist describes, the intentions of the law and the practical implementation are two very different things:
"The operation of the Foreign Account Tax Compliance Act (FATCA) has already been postponed for a year because of the immense problems that it is going to cause global investors. 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.
Since the American equity and bond markets are the biggest in the world, the vast majority of foreign fund managers will feel obliged to register. But that is where their problems will start. Managers will then have to tell the IRS whether their clients are American citizens. To do that they will have to find out a lot more than whether the client has an American address. They will need to check, for example, whether the client was born in the United States or whether interest or dividends are transferred to a bank account there.
If the fund manager has recalcitrant account holders, or cannot provide enough information to satisfy the IRS, it will have to apply the withholding tax on their share of its American assets. Fund rules will prohibit it from applying this charge to the affected clients, so the effect will be to penalise all investors, American or not. Clients from Aberdeen to Zagreb will be funding America's fiscal deficit."
Read the whole article here.
This is but one of many anti-avoidance rules that have proliferated in recent years, causing a tremendous increase in compliance costs, as documented by an Ernst and Young survey.
Follow William McBride on Twitter @EconoWill
Get Email Updates from the Tax Foundation
Join the Tax Foundation's fight for sound tax policy Go
About the Tax Policy Blog
The Tax Policy Blog is the official blog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.