FATCA IGAs and the One-Way Reporting Gap: What US Persons and Foreign Residents Actually Face
Table of contents
- What is FATCA, and how many countries have FATCA agreements with the United States?
- How do FATCA IGAs affect US citizens and green-card holders living outside the United States?
- Why are some foreign banks refusing or closing accounts for US citizens and LPRs?
- What is the difference between a “U.S. Reportable Account” and a “Country X Reportable Account”?
- What income must a US bank report on a foreign resident’s account?
- Can a foreign resident use an offshore company to avoid US bank reporting?
- What must a foreign bank report on an account controlled by a US person?
- Can US taxpayers hide assets behind offshore entities under FATCA?
What is FATCA, and how many countries have FATCA agreements with the United States?
FATCA (the Foreign Account Tax Compliance Act) is the US law behind the intergovernmental agreements (IGAs) that the US Treasury negotiated with some 113 countries. Treasury publishes the full country list on its website. Not all of these countries have actually signed. Many have what Treasury calls an “agreement in substance.” The IGAs require foreign financial institutions (FFIs, meaning non-US financial institutions) to identify “U.S. Persons” and “Substantial U.S. Owners,” and to report what the IGAs call “U.S. Reportable Accounts.” Treasury describes the agreements as “bilateral.” One published example, the FATCA IGA with Colombia, is largely identical in form to almost every other IGA.
How do FATCA IGAs affect US citizens and green-card holders living outside the United States?
They affect US citizens (USCs) and lawful permanent residents (LPRs, green-card holders) in many ways. Foreign financial institutions around the world now collect extensive information to identify account holders who are “U.S. Persons” or “Specified U.S. Persons,” the term the IGAs use for accounts that must be reported. If you received questions from a foreign bank asking whether you are a US person, FATCA is why. The reporting reaches beyond direct accounts. It also reaches entities that a US person controls.
Why are some foreign banks refusing or closing accounts for US citizens and LPRs?
Many FFIs have adopted a policy to no longer accept or retain US accounts. The cost of complying with FATCA for US citizens and lawful permanent residents is high. Many FFIs also want to avoid the risk of being penalized heavily by the US federal government, including being charged with aiding and abetting US taxpayers to evade their US tax obligations. Jack Townsend’s website, Federal Tax Crimes, reviews these cases in detail, with particular focus on Swiss banks and the US DOJ Program for Swiss Banks.
What is the difference between a “U.S. Reportable Account” and a “Country X Reportable Account”?
This difference is the core asymmetry of FATCA. A “U.S. Reportable Account” is defined extraordinarily broadly. A “Country X Reportable Account,” for example a Colombian Reportable Account, is defined narrowly. That gap is why the IGAs are not truly bilateral: US banks do not have to provide the same detailed information on their non-US clients that FFIs must provide on US accounts. A plain reading of the IGAs gets you to that conclusion.
What income must a US bank report on a foreign resident’s account?
Only a limited slice. A Colombian Reportable Account obligates US banks to send information on US source income of individual residents under chapter 3, plus certain accounts of Colombian entities. All non-US source income of a Colombia resident individual is not subject to reporting by the US financial institution. A Colombian resident could hold a US$150M portfolio of non-US mutual funds and ADRs (American Depositary Receipts) traded on the NYSE, with none of that income reported to the Colombian government. Stock sales of US corporations such as Apple, Ford, or Microsoft are not treated as “US source income” under chapter 3 either.
Can a foreign resident use an offshore company to avoid US bank reporting?
Yes, under the IGAs as written. If a Colombian resident holds investments through an offshore corporation, for example a BVI (British Virgin Islands) company, no reporting is required of the US financial institution. That holds even if the entire US$150M portfolio is invested in US stocks, US treasuries, and other American financial investments. Individuals resident in countries such as the UK, France, Mexico, China, the Netherlands, Spain, Colombia, Brazil, Belgium, Guatemala, and Luxembourg can generally hold US investment assets through opaque legal structures and hide behind the entity. A US financial institution has no duty to identify or disclose the beneficial owners to those residents’ tax authorities.
What must a foreign bank report on an account controlled by a US person?
Far more. A “U.S. Reportable Account” includes a US Person who is a “Controlling Person” of a “Non-U.S. Entity.” Take the reverse example: a Colombian bank must identify all of its clients holding non-US entities, an expensive due diligence process, and then determine whether each entity such as a BVI company has a “Specified U.S. Person” behind it. It does not matter whether the income comes from Colombian sources or non-Colombian sources. Income is income, and the FFI must report it. Banks in at least 113 countries must drill down and collect detailed information on the beneficial owners of basically all companies, trusts, and other legal entities, to find “U.S. persons” and “substantial U.S. owners” as defined in the FATCA regulations.
Can US taxpayers hide assets behind offshore entities under FATCA?
Generally no. FFIs must provide extensive information on all income in a “U.S. Reportable Account” to the IRS, either directly or indirectly through their own governments. US taxpayers cannot hide behind offshore opaque legal entities. It is generally illegal for US citizens to form and hold assets in a foreign corporation without reporting that corporation’s assets, activities, and earnings. Such a foreign corporation would generally be a CFC (controlled foreign corporation) or possibly a PFIC (passive foreign investment company).