FATCA, the Foreign Account Tax Compliance Act, is part of an instrumental structure devised in the United States to eliminate tax evasion by US individuals with investments in offshore banks. It forms a branch of the Hiring Incentives to Restore Employment (HIRE) Act.
Three core requirements of FATCA are:
1) Any US taxpayer with financial investments outside the US is required by law to disclose them to the Internal Revenue Service (IRS).
2) Foreign Financial Institutions (FFIs) must immediately report to the IRS some defined information about the financial holdings of US citizens.
3) FFIs must communicate with the IRS about foreign elements for which US taxpayers have a considerable ownership interest. To fulfil FATCA, Intergovernmental Cooperation Agreements (IGAs) have been put in place . These are divided into two models:
This model was launched at the end of 2012 and focuses on the disagreements between local laws and FATCA. Under this the Model 1 structure, US account holders’ information is delivered through their own governments instead of directly to the IRS. Any FATCA partner will also be under scrutiny through the IGAs’ mutual entente. To further the commitment to this bill, the UK, France, Spain, Italy and Germany are all in agreement to contribute to this clause.
The FFIs will inform the IRS rather than through their own government any tax related details that are needed will be transmitted. There have not been any further statements at this stage, however Japan and Switzerland are in agreement with the terms on FATCA compliance.
The US has a pact with Canada which dictates that there is a reciprocal code of information sharing. They are required to expose anyone who may have links to the US and revealing their assets, incomes and investments. Canadian taxation is calculated on residency but the US has been following citizens in whichever country they live.