It’s Time You Met FATCA

Somewhere along the line Canadians developed an almost pathological paranoia about the U.S. PATRIOT Act but this post isn’t about that legislation. No, it’s about the new American kid on the block: the Foreign Accounts Tax Compliance Act* (“FATCA”). It actually makes one feel sorry for financial institutions and other organizations affected by this legislation.

[*Before you ask: FATCA is Title V of the Hiring Incentives to Restore Employment Act of 2010. It amends the U.S. Internal Revenue Code by adding a new chapter. Scroll down through the above link and you’ll find it.]

Personal information is subject to the laws of the jurisdiction in which it is located. What if I told you that you had to give me personal information about real people in other countries, possibly in contravention of the laws of those countries, or I’d withhold 30% of your income in my country? Welcome to FATCA. (Not to be confused with FACTA — the Fair and Accurate Credit Transactions Act.)

FATCA was enacted in March 2010 and its rules become effective for payments made after 31 December 2012. The legislation has five parts but only Part 1 is relevant to Canadian organizations and has garnered the most attention.

The heart of the matter is that, under FATCA, “withholdable payments” to “foreign financial institutions” and other foreign entities will be subject to 30 percent withholding unless there is compliance with specific requirements. FATCA rules, to the extent they exist,  provide few details regarding the withholding and reporting requirements so affected parties will need IRS guidance on a broad range of issues.

For foreign financial institutions, those requirements involve identifying whether U.S. citizens hold accounts with the institution and, if they do, to report to the IRS about those accounts. If there is a foreign law that prevents the reporting of account information, FATCA requires institutions to obtain a waiver of that law from account holders or otherwise close the accounts. Non-financial foreign organizations must provide the withholding agent in the U.S. with either a certification that the organization has no “substantial United States owners” or, if they do, provide information about such owners.

Failure to comply results in a 30% withholding of tax on all “withholdable amounts” (a defined term), including those with no connection to American-held accounts or investments. “Withholding” is a significant event in the tax world and compliance becomes a priority because no one wants to be at a competitive disadvantage vis-à-vis investors or stock markets by reason of being subject to such a withholding.

As one might expect with tax statutes, there are lots of defined terms so when we say “American” we really mean a “specified United States person”. What is a “specified U.S. person” you ask? It’s any “U.S. person” (as defined in the IRS Code) except for publicly traded coporation (or an affiliate thereof) and “exempt” organizations (e.g. an American government or government agency, bank, real estate investment trust, regulated investment company, common trust fund or an exempt trust).

So affected institutions (remember FATCA covers both financial and non-financial entities) must identify clients who are American (which means asking the question of every client since “U.S. persons” do live abroad); obtain their consent to the disclosure of sensitive personal information to the IRS or withhold the provision of a service for a failure to provide consent to disclose. How these organizations reconcile FATCA compliance with PIPEDA compliance is a topic for another day.

Hmmm, if the IRS doesn’t get you, the federal Privacy Commissioner does. Talk about a rock and a hard place.

3 Responses to “It’s Time You Met FATCA”

  1. FATCA is the most ill thought out legislation I have ever seen in my life time and that’s saying something. Most of the people affected owe zero taxes to the U.S. due to the fact they pay higher rates in their country of residence. In some cases people who are stay at home moms with a foreign spouse, who works at a foreign job, in a foreign country are being affected since they have checking rights on those accounts just to pay their bills. This means the foreign persons income can be fined even when the American person in the household owed no taxes to the U.S. at all. It is harming families and working people, the elderly are affected too. It’s draconian and it’s not going after the big fish who off shore money to the Caymen Islands from within the U.S. It lumps together working people, the poor and the old who owe no taxes with drug lords and criminals. Obama should have looked much closer at the affect this would have before signing this thing. Japan and Australia have said they will not comply and Canada has spoken out strongly against it. Personally, I am seeing banks turn away U.S.. customers and seeing people get rid of U.S. investments since it’s too much of an invasion for them to keep them. It is literally insane in a time of economic dire straights to attack Americans and foreign citizens who owed no taxes at all to the U.S. I don’t think this move will soon be forgotten by those it harmed. Law abiding citizens all over the world are really upset about this. I know I won’t soon forget how it has impacted my innocent family.

  2. In my opinion FATCA will result in a mass exodus of capital from the United States. While in your next post you say that Canada’s privacy laws will not stop FATCA, I think a greater case can be made for the Human Rights Codes. Ontario’s code requires equality of services without regard to citizenship. The way I read this, is that the banks should not be allowed to treat you different just because you are from a certain country. If that country were Pakistan or say Kenya, we would more easily see the abuse that FATCA is to the human rights of the citizens coming from those countries.

    It is also important to note that the United States is including people born in the United States, such as border babies–people whose only fault is to not live near a Canadian hospital so they were born in the US. How in anyone’s right mind is it proper for a bank to hand over such a person’s account information to the United States?

    I would also call your attention to the fact that some “Americans” who relinquished their citizenship are now being treated ex post facto against their will as American citizens. This is a casus belli, and attempt of a hostile foreign power to take tribute from its neighbor. The Canadian government needs to put a stop to this crap–it is quite beyond the ability of individual people to deal with it. We need the protection of our government.

  3. This Fatca law is stupid . It will only reduce US influence all over the world. Foreign businessman wants clear and easy law to deal with US person. This vague law make everything cumbersome. Obama needed to talk to real US businessman( big and small business) before he signed this law. But it is not too late, we can repeal it.

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