Back in 2010, a little known, little-debated bill was attached to the much-discussed jobs bill. The Foreign Account Tax Compliance Act (FATCA) passed into law without much resistance. FATCA’s unprecedented consequences were noticed only after it was enacted.
FFI — Foreign Financial Institutions
An FFI is any non-US financial institution. So far, the IRS has over 77,000 FFIs registered pursuant to FATCA, and the United States has bilateral intergovernmental agreements (actual or in substance) with over 100 countries. In Latin America so far, about 3800 FFIs have agreed to disclose U.S. depositor or investor information with the IRS.
Fall 2014 saw two South American countries sign Inter-Governmental Agreements (IGAs) with the United States to share their financial institutional information. Chile signed a Model 2 agreement in March, and Brazil a signed Model 1 agreement in November (joining Costa Rica, which previously signed on in 2013).
Panama and Peru have Model 1 agreements in substance (meaning no formal declaration has been signed, but the parties agree on relevant terms). Nicaragua and Paraguay have Model 2 agreements in substance. In the Caribbean in 2014, the Bahamas, Barbados, the British Virgin Islands, and Jamaica joined Bermuda and the Cayman Islands with Model 1 Agreements.
These countries are not passing or ratifying FATCA, necessarily. They are entering into IGAs with the U.S. to exchange information pursuant to the structures and goals of FATCA. Tax information exchange agreements (TIEA) already exist. The United States has several. FATCA is an enforcement system designed to make taxpayers comply and pay a tax they already owe (the United States taxes citizens and permanent residents on their worldwide income).
FATCA requires foreign financial institutions (FFIs), a broad term that includes banks and other private entities, to report information about United States person account holders to either their national tax authority or the IRS (depending on which model agreement they signed). If the FFI is not a participating FFI, then it gets a 30% withholding tax on payments sourced to the United States, and they get frozen out of the US market.
FATCA: Costa Rica
The US-Costa Rica Model 1 agreement was signed on November 4th, 2013, in which Costa Rican FFIs will report US person client information to the national government, who will then remit it to the IRS. The IGA incorporated the FATCA deadlines pursuant to IRS Notice 2013-43. It also was the first IGA to include new sections requiring each country to provide written notification when safeguards are in place to protect confidentiality and when infrastructure is in place for effective exchange, setting up requirements of when exchanging information would begin, and establishing a new termination deadline clause (September 30, 2015).
FATCA: Brazil
The US and Brazil signed, on September 23, 2014, a reciprocal Model 1 IGA, formalizing the agreement that Brazil had previously been designated as having in substance. Brazilian FFIs will have to report information regarding their US account holders to the national government (the Receita Federal Brasileira, specifically), who will then send it to the IRS. Brazilian FFIs who comply will be deemed compliant and will avoid the 30% withholding. The Brazilian legislature must still enact legislation to mandate the information collection and create the reporting system.
FATCA: Chile
Chile entered into a Model 2 IGA with the United States on March 5, 2014. Chilean FFIs will report US account holder information directly to the IRS, not to a Chilean tax authority, like the Servicio de Impuestos Internos (whose website reminds one of the IRS). The US-Chile IGA incorporates much of the same language as the Model 2 agreement; however, it also includes an article outlining the importance of the confidentiality of the information received from and provided to the United States.
Latin American countries are also seeking to create multilateral tax information sharing agreements – but some do not want to do it unless they must. For example, Columbia and Panama are in a spat. Columbia wanted to enter into a FATCA-like agreement with Panama, and Panama wanted none of it. Panama has a thriving financial center in Panama City, and many wealthy investors come to Panama City for the opportunity and privacy (the local banks don’t collect information on their non-resident customers). This privacy is enticing to investors all over the world, Columbians included.
The Columbian government asked the Panamanian government to sign a FATCA-like tax information exchange agreement (TIEA), but Panama refused. The Columbian government responded by threatening to label Panama a “tax haven” and noted that Columbia is not asking for anything that Panama isn’t already providing to other countries (referring to the US-Panama FATCA IGA). Panama threatened to expel Columbian workers.
Tensions eased, however, and the two countries have a TIEA in substance, but nothing signed yet.
Further Thoughts on the Administration of FATCA
There are lingering concerns about what will happen with the disclosed information. The IGAs may be signed, but several participating countries, like Brazil and Chile, have yet to set up the information sharing infrastructure and procedures necessary to comply with the FATCA IGAs. We worry about confidentiality when sharing information between states and the federal government – now we are sharing information between sovereigns.
Other concerns include quick, efficient processing of the shared information – any procedures in place are clearly untested. The IRS has under 90,000 employees, perhaps less than 10,000 of those in Large Business & International trying to keep tabs on an over-abundance of regulation, information and acronyms. Meanwhile, the IRS just had their budget cut, and they are still expected to administer the offshore disclosure programs, while simultaneously gathering, sorting, analyzing, disseminating, and protecting that information. The IRS is, as we say, over authorized and understaffed.
The time to decide to disclose or not is coming to an end
Obviously, the threat of FFI's reporting account information of US account holders that the FFI's suspect of being US persons is weighing heavily on many US expatriates, and those with offshore interests in Latin American and around the world who know themselves not to be in full compliance. .
If you need assistance understanding if you should get into a disclosure program, contact us. We can help. Call us at 888-727-8796 or email info@irsmedic.com.
