On March 18, 2010, the Foreign Account Tax Compliance Act (FATCA) came into being with the sanction of the then US President, Barack Obama. FATCA rules that all foreign financial institutions (FFIs) outside of the US must report annually on all financial accounts (with a minimum value of 50,000 USD) held by US citizens to the IRS.
The main objective behind FATCA was to prevent tax evasion and ensure that taxes are collected efficiently under the following two guidelines:
- All U.S. citizens, both living in the country and abroad must disclose and report all their foreign assets along with their financial holdings in offshore financial accounts to the IRS annually.
- All foreign financial institutions (FFIs) – foreign banks, investment houses, and insurance companies – must report the balances in all the financial accounts held by US citizens to the IRS.
Appeal Against FATCA
Ever since its inception, FATCA has been viewed by many as a ‘toxic global tax law,’ and numerous efforts have been made to repeal FATCA, although to no avail. Even after Trump’s 2017 Tax Reform, the FATCA remains unscathed. Denise Hintzke, the MD and Global Tax leader at Deloitte states:
“There have been calls for FATCA’s repeal since it was introduced in 2010. There might be upticks right now because whenever you see a change in government, it can be seen as an opportunity to introduce a bill and sway things…We’ve seen no clear indication that FATCA is likely to be repealed.”
In 2017, Republican Senator Rand Paul, a staunch opponent of FATCA, along with several other plaintiffs moved to court to challenge both FATCA and the Foreign Bank Account Report (FBAR). The case, Mark Crawford, et al. vs. United States Department of the Treasury, et al., aimed to prevent the enforcement of the intergovernmental agreement (IGA) negotiations of the US Treasury and the IRS with foreign jurisdictions according to the statutes of FATCA and FBAR. However, the appeal was dismissed on the ground that Senator Paul was being denied the right to vote on FATCA was an insufficient cause to repeal FATCA altogether.
Although the case was taken to the Supreme Court as the final attempt to repeal FATCA, on April 2, 2018, the U.S. Supreme Court refused to review the decision of the Sixth Circuit Court. So, the FATCA is going nowhere, at least not anytime soon.
3 Reasons Why FATCA Is Here To Stay
FATCA Is Helping Combat Tax Non-Compliance
Apparently, the US Treasury was running at a loss of $100 billion annually because of offshore non-tax compliance. Such a huge loss had adverse bearings on the country’s economy. Since public infrastructure, educational institutions, healthcare, maintenance of law and order, all depend on tax dollars, tax evasion would mean a massive blow to these essential social overheads. Also, while large MNCs evade their taxes, small firms and business owners are hit hard.
Transparency In Financial Reporting Is The Global Trend Today
Today, the global inclination is towards driving transparency in financial reporting, and FATCA certainly fits that bill. The Organisation for Economic Co-operation and Development’s (OECD) is pushing for transparency with initiatives such as the Base Erosion and Profit Shifting (BEPS) and the Common Reporting Standard (CRS). Now, over 100 participating jurisdictions signed up under CRS to disclose information on financial assets and accounts for taxation purposes. FATCA is just another step in that direction.
FATCA Is Just An Upgraded Version Of The Previous Taxation Policy
FATCA’s tax reporting framework is not entirely new. It is very similar to the tax reporting laws that previously existed – US citizens living abroad were bound to report their financial assets and accounts since long back, even before FATCA was introduced. The only backlog of FATCA is the high penalty it can impose on FFIs – if any FFI fails to comply with the norms of FATCA, both the institution and its account holders can be penalized with 30% withholding tax on US source payments.
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