The Foreign Account Tax Compliance Act (“FATCA”) was enacted in 2010 in order to identify foreign financial accounts held by U.S. citizens and make it more difficult for Americans to hide assets in offshore accounts. FATCA, which was implemented as a part of the Hiring Incentives to Restore Employment Act, requires foreign financial institutions to search their records for any U.S. citizen and report the assets and identities of such persons to the U.S. Department of the Treasury. Foreign financial institutions are encouraged to register for FATCA regulation compliance directly with the U.S. Internal Revenue Service (“IRS”) or to comply with FATCA intergovernmental agreements in their jurisdiction, which have been signed by over one hundred foreign governments. Institutions that refuse to comply with FATCA may be required to withhold 30% in tax payments on specific U.S.-source incomes, including interest or dividends from U.S. sources and gross proceeds from the sale of any U.S.-sourced property which can produce interest or dividends.
It appears that the IRS is now looking to curtail FATCA’s impact by reducing the regulatory burden it places on foreign financial institutions. In a notice from the IRS and the U.S. Treasury Department issued on December 13, 2018, new proposed regulations effecting FATCA would: (1) eliminate the withholding on gross proceeds for institutions which fail to comply with FATCA; (2) suspend the “foreign passthru payment” withholding; (3) eliminate withholdings on certain insurance premiums; and (4) clarify what institutions qualify as “investment entities” under FATCA. These proposed regulations collectively reduce the financial burden faced by foreign investment institutions under FATCA, particularly those that refuse to turn over personal information of account holders.
Despite its revenue potential, FATCA has faced substantial pushback since its inception. Recent efforts in both the U.S. Senate and U.S. House of Representatives to repeal FATCA have floundered and the U.S. Sixth Circuit recently dismissed a constitutional challenge brought against FATCA. But opposition to FATCA remains strong. In particular, foreign financial institutions argue that complying with the withholdings requirement itself is an unreasonable administrative burden and that complying with FATCA places too high a price on institutions that choose not to report the information of its U.S. account holders. Foreign financial institutions are now required to sift through substantial quantities of data for potential U.S. citizens and enhance their customer intake procedures for new accounts. The institutions also have to implement new tax withholdings procedures and, prior to the proposed regulations, account for potential “foreign passthru payments.” Early estimates of the costs on financial institutions to implement FATCA range from hundreds of millions to over $10 billion, not accounting for the 30% withholding tax imposed for failure to comply with FATCA.
FATCA has also faced criticism for its impact on the privacy of U.S. citizens. These concerns emanate from the FATCA requirement that financial institutions in certain countries report information to the IRS that they are not even legally permitted to report to their own tax agencies. Furthermore, some data protections laws in the European Union do not permit involuntary disclosures of personal information to foreign countries as required by FATCA, and FATCA provides no provisions for protecting taxpayers’ rights.
Beyond privacy concerns, FATCA has also faced criticism for the unintended burden it places on U.S. expatriates. U.S. citizens living abroad have found themselves shut out by financial institutions that close their doors to Americans in order to avoid having to comply with FATCA. This is especially worrisome for accidental Americans who may not even be aware of their U.S. affiliation by way of birthright citizenship or parental citizenship. The challenges stemming from FATCA have been implicated in a number of high-profile persons’ decisions to renounce their U.S. citizenship and is considered a contributing factor for record highs of citizenship renunciation in recent years.
While FATCA puts pressure on U.S. citizens living abroad, it also provides substantial federal revenues and helps to deter offshore tax evasion. Offshore tax evasion was listed in the IRS “Dirty Dozen” tax scams in 2018 and a significant portion of the world’s GDP is held up in global tax havens. The cost to the U.S. government of individual tax evasion has been estimated at somewhere between $40 billion and $70 billion, and FATCA looks to recover some of this lost income. While early estimates of potential tax recovery were optimistic, more recent analyses claim that additional tax revenues collected by FATCA are “statistically insignificant.” However, FATCA has found success on some level. As of 2016, FATCA had brought in $10 billion, though those funds mostly stemmed from penalties, rather than tax dollars from offshore accounts.
Although FATCA is not without problems, its goal of lessening tax evasion through offshore accounts is an important one that requires support from all sides. Even if FATCA’s future is unclear, the proposed regulations show a willingness on the part of the IRS to work with foreign financial institutions to find a more adequate solution. The proposed regulations will be a welcome change for institutions seeking to implement FATCA under an intergovernmental agreement or subject to the withholdings penalty, and may pave the way for further refinement and improved compliance in the future.
Austin Kuhn a second-year student at Columbia Law School. In addition to being a staff member on the Journal of Transnational Law, Austin is the treasurer for the Education Law and Policy Society and is in the Adolescent Representation Clinic.