In response to a 2010 law known as FATCA (Foreign Account Tax Compliance Act) the U.S has encouraged foreign institutions to supply the IRS with names, account numbers and balances for accounts controlled by U.S. Taxpayers. All this in an effort to target Americans hiding assets overseas.
Nearly 70 countries have agreed to share this information with the IRS due to a new penalty they will incur under the FATCA that withholds 30% of a foreign banks transactions if they refuse to share information with the IRS. This is a steep penalty that most countries are trying to avoid.
Additionally U.S. banks that fail to withhold the 30% tax would be liable for it themselves and could face steep charges.
More than 77-thousand foreign banks, investment funds and other financial institutions have already agreed to share this information. The Treasury will keep an updated list of all complying banks so American Financial Institutions will know it is OK to send them payments without withholding tax information. As a side note to those with investments in Russia; 515 Russian institutions were forced to apply directly with the IRS because the U.S. halted negotiations with the Russian Government due to the crisis in the Ukraine.
Robert Stack, deputy assistant treasury secretary for international tax affairs, said “The strong international support for FATCA is clear, and this success will help us in our goal of stopping tax evasion and narrowing the tax gap.”
The law is so strong, foreign banks are using loopholes in their own laws to provide personal information to the U.S. They circumvent their countries privacy laws by providing the information to their local government and having them release it to the U.S. As the provisions of this law affect more financial institutions, the U.S. is slowly making tax havens a thing of the past.
Officials are still debating a “tax holiday” which would allow corporations and individuals to transfer funds from their foreign accounts to the U.S. at little or no tax at all. The reason why it’s still being disputed is in 2004, when the policy was being tested, it did little for the economy as most companies just transferred some income in order to make their financial statement look better to investors.
As long as companies and investors keep receiving preferred tax rates in other countries, they will keep their income overseas and maximize their tax savings and investment opportunities.