(This is an important update to a posting originally published Nov. 9, 2012).

I’ve written extensively in this blog about the destructive effects of an ill-conceived law championed by President Obama–the Foreign Account Tax Compliance Act of 2010.

Among many other statist provisions, FATCA demands that virtually every foreign financial institution (FFI) sign and strictly comply with a reporting and withholding agreement with the IRS with respect to US account holders. The IRS refers to an FFI that signs such an agreement as a “participating FFI.” So-called “non-participating FFIs” will be subject to a 30% gross withholding tax on certain “withholdable payments.”

Foreign entities that are not financial institutions are referred to as “non-financial foreign entities” (NFFEs). They are subject to less onerous requirements to avoid FATCA withholding. NFFEs need only provide a withholding agent with the name, address and taxpayer ID number of each of its “substantial U.S. owners,” or to certify that it does not have any substantial U.S. owners. A substantial U.S. owner any “specified US person” with:

• A greater than 10% ownership interest in the entity, or
• Any equity interest in the entity if it is an investment vehicle or an insurance company

Unless certain exceptions apply with respect to the account or the payee, the FFI agreement requires participating FFIs to collect and report to the IRS information with respect to:

• U.S. persons that hold “financial accounts,” and
• Substantial U.S owners of certain NFFEs

FFI agreements also require participating FFIs to withhold 30% of payments to non-participating FFIs and any account holder at the FFI that fails to provide the information that the FFI has agreed to provide the IRS (“recalcitrant account holders”).

Originally the FATCA withholding tax was slated to come into effect on Jan. 1, 2013, but now the IRS has announced it will phase in withholding beginning Jan. 1, 2014 (IRS Announcement 2012-42).

• On Jan. 1, 2014, FATCA withholding on fixed, determinable, annual, periodical (FDAP) income payments to non-participating FFIs and recalcitrant payees begins.
• On Jan. 1, 2017, FATCA withholding on gross proceeds payments to non-participating FFIs and recalcitrant payees begins. The 30% withholding tax applies to the gross proceeds from the sale or other disposition of any property of a type which can produce FDAP income, such as interest or dividends, from sources within the United States.
• No earlier than Jan. 1, 2017, withholding on foreign pass-through payments begins. (See FAQs 17-18 at this link for definition).

FATCA is a textbook example of a law with unanticipated consequences. While those championing FATCA (beginning with President Obama) would never admit it, FATCA has grave implications for the United States. I believe that unless Congress repeals or indefinitely delays implementation of FATCA, inbound investments by foreigners will collapse.

To rent or buy this 54 minute video with Costa Rica Attorney Roger Petersen please visit our Video On Demand page here.

Foreign direct investment in the United States has already declined nearly one-third since 2008. How many wealthy investors will want to invest in the United States when they learn that 30% of the gross proceeds of their U.S. investments might be confiscated upon repatriation?

Another and possibly intentional consequence of FATCA is that thousands of foreign banks, trust companies, and other entities have terminated their relationships with U.S. customers. The easiest way for a FFI or NFFE to comply with FATCA is simply certify that it has no U.S. clients.

This opportunity is specifically written into the law. If you were the chairman of the board of directors of an offshore bank, would you want to risk having 30% of capital invested in the United States confiscated?

Unfortunately, I’m not at all confident that Congress will have the political courage to repeal FATCA. After all, doing so would deprive them of a bully pulpit against “offshore tax-evaders” they claim, without a shred of proof, are illegally depriving the U.S. Treasury of up to $150 billion annually of tax revenues. Even if Congress does so, I believe President Obama would probably veto the repeal.

I’ve predicted for some time that virtually all offshore banks will become FATCA compliant. Most will do so by jettisoning their U.S. clients. However, the U.S. market for offshore services is simply too big to ignore. Some FATCA-compliant offshore banks remain willing to offer services to tax-compliant U.S. clients.

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Andrew Makarik

to@welovecostarica.com

Andrew Makarik is the main editor of WeLoveCostaRica, a fan of this sunny country. He is also a loving husband and a has a lovely daughter. By being a devoted family man and the biggest Costa Rica fan, he wants to make more people feel at home there. WeLoveCostaRica unites people and helps them find new home or a new travel destination. This website is a friendly community where everyone can find not only information, but also new friends and travel pals. Andrew is also passionate about IT and programming, so he himself maintains a friendly atmosphere in this cozy environment of WeLoveCostaRica.com.