Why Foreign Banks Will Shun American Business
Americans who frequent travel or reside abroad, as well as companies who conduct business abroad frequently require accounts with foreign financial institutions. In the near future, however foreign banks could be shutting the doors of American depositorsdue to an expansive U.S. law. In the Hiring Incentives to Restore Employment (HIRE) Act, passed in 2010 was a tax legislation that will alter the way that foreign banks interact with U.S. and its citizens. The law, known as the Foreign Account Tax Compliance Act (FATCA) will in essence make all foreign banks with U.S. account holders to submit annual reports with the Internal Revenue Service about their American customers their actions. The banks will also have be able to charge a thirty% withholding tax from U.S. income from any American customers who are not willing to have their transactions reported in full to IRS. Organizations that do not agree to these rules will be considered non-compliant, and could be liable for 30 percent withholding tax in their individual tax brackets in the form of “U.S. source income,” which includes the selling of U.S. securities. The law is set to take the law in 2022.The aim is to identify tax evaders who stash cash in offshore bank accounts. Instead of taking the initiative to track down those responsible The IRS suggests that it outsource the job to financial institutions from abroad and force them to perform the work of finding American customers and tracking their accounts.
FATCA has been the subject of intense criticism from both foreign financial institutions and government officials and also from American expatriates. Because of the administrative burdens imposed by the law, the law's implementation has been delayed by a year, but it's likely that not all affected will be ready by the time. The Canadian bank TD Bank has estimated that it will have to invest $100 million for new software and technologies to meet the requirements of the law. In the meantime, Canadian Finance Minister Jim Flaherty has called the personal requirement to report “a frightening prospect that is causing unnecessary stress and fear among law-abiding hardworking dual citizens.” (1) While certain financial institutions would prefer to take on the burden of being real IRS agents to maintain their American customers, it's highly likely that other companies won't choose to break connections with American companies and citizens.
Some time ago, I created an account at an offshore branch of a global bank to purchase some euros to fund my long-distance trip to Europe. The trip was delayed indefinitely, however, I've maintained the account in order to avoid the cost of changing my euros to dollars , and then euros once more. I submit the account each annually to U.S. Treasury, and I make tax payments on the interest that is less than $2 every month. If I attempted to open an account like this today it's likely that HSBC will not let me open the account. The cost of compliance per U.S. customer under FATCA is too much for low balance accounts to be worthwhile. If American customers are escorted around through by American Tax collectors, the banks are likely to shut their doors.
And, perhaps more important, FATCA encourages foreign financial institutions to restrict their exposure U.S. assets. In a letter jointly addressed to both the Treasury as well as to IRS, the Treasury and IRS in which the European Banking Federation and the Institute of International Bankers, who together comprise the majority all non-U.S. financial institutions as well as other securities companies that could have to contend with FATCA and warned of the possibility that “many [foreign financial institutions], particularly smaller ones or those with minimal U.S. investments or U.S. customers, will opt out of U.S. securities rather than enter into a direct contractual agreement with a foreign tax authority (the IRS) that imposes substantial new obligations and the significant reputational, regulatory, and financial risks of potentially failing those obligations.” The widespread sale of U.S. securities by institutions trying to stay clear of the tax burdens of FATCA can have significant negative effects on and the U.S. economy, though it may not have the same impact like the FATCA critics have suggested. This is all meant to bring in approximately nine billion dollars of tax revenues over the course of a decade as per the IRS. If you're a nation with an estimated $3.8 trillion budget per year this is a tiny amount. The idea, however, is that the smallest amount is worth it if that someone else pays all costs.
Many ways FATCA has a lot in common with the disastrous Form 1099 scheme that was sneaked into the health reform legislation. The law, which was supposedly designed to help offset the cost of the health reform bill and would have created new forms of forms of paperwork, requiring businesses to issue tax forms for 1099 to any individual or company that spend more than $600 on products or services every tax year. By requiring businesses to record their sources of income and income streams, the IRS wanted to reduce on income that was not reported. Congress seemed to have no issues with requiring businesses to perform the IRS job.
After business owners grew wise but they swiftly voiced their displeasure. The measure was eventually repealed prior to it could take effect. Since the first blows be borne by foreign businesses who have less influence with American legislators, repeal might not be as easy for FATCA. Americans might have to witness the impact of the law in person before they can comprehend the ripple effects it could bring to them. Tax evasion is necessary and just However, trying to coerce foreign businesses to pay the tax isn't the right method to go about it. In the event that FATCA isn't repealed by 2014, it will be very obvious.