Americans avoiding US taxes and stashing cash abroad are in trouble from July 1, when a new law forces institutions hiding money to report on their clients. The law will make business with Americans harder, but the US hopes it will raise billions.
The US Foreign Account Tax Compliance Act, or FATCA, comes into force on July 1 and requires foreign banks to hand over data on clients to the US International Revenue Service (IRS). If a bank does not report such information, it could be subject to a 30 percent withholding tax.
FATCA legislation, signed into law in 2010, requires overseas financial institutions to identify their American customers to the IRS. The law applies to any account with more than $50,000.
The legislation is largely meant to target wealthy individuals with unreported income in countries with low tax regimes, like Switzerland, Luxembourg, or sunny islands in the British Caribbean.
US authorities have led successful campaigns against Switzerland’s two largest banks, UBS and Credit Suisse, after they helped wealthy Americans avoid paying taxes in the US. Credit Suisse was found to have aided Americans conceal as much as $10 billion from the IRS, and UBS was slapped with a $780 million fine for facilitating tax evasion in 2009.
Gathering uncollected taxes is a strategy for the US government to patch up its gaping federal budget hole. After the Swiss banks were exposed for helping Americans dodge taxes, US tax authorities launched a more comprehensive campaign to bring back tax dollars.
The new law hopes to recover billions of dollars in tax revenue, and since 2009, US financial regulators have already reeled back $6.5 billion in unpaid tax and penalties, Bloomberg News reports. A large number of Americans, 45,000, voluntarily disclosed their offshore holdings.
The initiative is unprecedented, and the results are a great unknown, and may even end up costing the US money in its execution.
"FATCA was never subject to a cost benefit analysis, so it's hard to predict the results. There are some published sources indicating that the implementation costs will exceed the revenue generated," Mary Louise Serrato, Executive Director of American Citizens Abroad, told RT.
The US is one of the few countries in the world that requires its citizens to pay US taxes, regardless of whether they live in the US or abroad.
According to the US Treasury Department 77,000 banks from over 80 countries have registered to comply with FATCA. The registration of foreign banks with the US tax authorities ended on May 5.
Since legislation was made public in 2010, hundreds of millionaires and billionaires have voluntarily renounced their citizenship, opting for more tax-friendly countries to call ‘home’.
In 2013, a record 2,999 Americans renounced their citizenship, according to a figure Bloomberg News reported.
Tina Turner famously gave up her US passport to become a Swiss citizen, but said it wasn’t related to paying taxes on her $200 million fortune.
Giving up her US citizenship will reduce the paperwork headache, and now she will no longer have to pay taxes both in Switzerland, where she has lived for 20 years, and in the US.
Facebook co-founder and billionaire Eduardo Saverin has also ditched his US passport since FATCA legislation was introduced.
The legislation will be a taxing process on not just the rich and famous, but also the average expat. Serrato explained cases where Americans living abroad have lost access to financial products and services because banks are hesitant about facing thorny compliance probes.
"Now banks that do keep Americans as customers will require documentation that they are tax compliant," Serrato said.