The Foreign Account and Tax Compliance Act of the USA (FATCA)

US Investors in Germany are being driven away by their German Banks

The Foreign Account and Tax Compliance Act of the USA

Tax collectors will never know the invigorating joys of treading water in the deep end without a life belt – Jeffrey Bernard 1932-97 in The Spectator 03 March 1984

The Foreign Account Tax Compliance Act (FATCA) was introduced in March 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010. Its intention is to combat tax evasion by US nationals and those non-US citizens living in the USA who hold investments in offshore accounts.

The original target date had been set as 01 January 2013; the act is now finally to take effect on 01 July 2013.

The arms of the IRS stretch world-wide; under the FATCA foreign (non-US) financial institutions will have to deliver far more information on their US clients – or US Persons, as defined under the law – to the IRS than ever before.

Obligations of the banks

Foreign institutions are individually required to agree a contract with the IRS. If they do not, then all cash flow derived from US investment assets by the bank or their clients will be subject to an automatic 30% withholding tax on any “withholdable payment”. This penalty rate will apply as much to non-US citizens and banks with assets in the US as those from the US.

The fact of the act itself has been enough to cause a number of German Banks to tell their US clients with investments, for instance in investment funds or equities, to take their business elsewhere. The reasons given vary from 'we won't allow ourselves to be blackmailed by the Americans…' to, 'we don't have the administrative software to cope with the substantial extra workload'.

In view of the organizational workload involved, non-US financial institutions will probably start gathering data from affected clients now. Some have already decided (whether permanently or not) to discard their US clients; others are considering their next step.

Obligations of the investors

In summary, all US Citizens and those non-US citizens living in the US will, via the financial institutions holding their assets, have to comply with the terms of FATCA reporting. In particular accountholders will have to provide their bank with FATCA compliant documentation.

There are different thresholds under the FATCA, depending on whether the investor resides in the US or not, after which the new regulations start to bite. For US Citizens living offshore total assets of less than $200,000 for single people or $400,000 for a couple mean that the relevant form (Form 8938) does not need to be submitted. In the US the threshold amounts are much lower; a professional tax adviser will help you here.

There are however reputable financial specialist institutions who are facing FATCA with confidence and are willing to accept US citizens as investment clients. We are happy to assist our US clients in approaching these houses with their investment portfolios in order to find an efficient solution to their needs.

This brief summary is not intended to be seen as tax advice. You are urged to contact your tax adviser for an expert opinion on how to react to this new act. Information as per January 2012.

John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung. He is a Fellow of the Chartered Institute for Securities and Investment in London.

Townsend@insure-invest.de
www.insure-invest.de