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Overreaching: Time to Reconsider FATCA

2 min readBy: William McBride

The Foreign Account TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. 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% withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. 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