By Merlin Hernandez

In keeping with a focus on having corporate America pay its fair share of the tax burden, and bring home some of the tax revenues that have been protected from the long arm of the IRS in tax havens around the world, the government passed the Foreign Account Tax Compliance Act (FATCA) in 2010. FATCA forms part of the Hiring Incentives to Restore Employment (HIRE) Act to combat tax evasion and is intended to secure compliance by US taxpayers with laws that require the declaration of all financial assets – domestic and international. FATCA ensures that Foreign Financial Institutions (FFIs) are now legally bound to disclose information on the foreign financial assets and offshore accounts of US taxpayers or face a 30% withholding tax on any US-source income due to these FFIs.

The benefits to FATCA go beyond attacking unyielding unemployment levels. An intractable budget deficit, an aging workforce, and technological advances that threaten to leave a significant section of the population unemployed or underemployed, means that government must find creative ways to ensure that tax revenues can fulfill the continued need for re-tooling the workforce, meeting the SSI/Medicare obligations to citizens who have paid their dues, protecting those in the society who are vulnerable (children, veterans, the disabled), and assiduously trimming the deficit. There has to be a sustained strategy that could lead to balancing the budget and keeping the dollar strong. Every avenue to legitimately reach taxable assets is likely to be explored.

Since the passing of the Act, the government has quietly gone about securing bilateral agreements for FATCA compliance between the US and foreign jurisdictions. These agreements are in varying stages of completion and the US continues to work diligently to bring as many countries as possible into the fold by mid 2013. France, Germany, Spain, and the UK have already ratified the Intergovernmental Agreement (IGA), with other OECD member countries in the pipeline to be on board by year end. IGAs with popular Offshore Financial Centers (OFCs) and tax havens in the Caribbean and Europe are also expected to be wrapped up by December. The overwhelming support shown by foreign governments for compliance is testimony to the recognition of the reciprocal value the measure holds as a potentially lucrative source of revenue for sagging economies around the world. The US accounts of foreign nationals are now fair game.

An interesting anomaly is that while the law is intended to snare corporations, speculators, investors, and nefarious entities, many individual US citizens and permanent residents who, though currently required to report income from non-US sources and assets held outside the US on tax returns, have inadvertently or deliberately failed to do so. Prior to FATCA there was no facile avenue for the IRS to access such information. Compliance with FATCA dictates that FFIs must disclose to the IRS all accounts held by US taxpayers. There are severe civil and criminal penalties for both institutions and individuals for non-compliance. Banks are already turning over information on recalcitrant taxpayers to the federal government.