In the United States, there are an increasing number of offshore multi-national corporations and business investments. The frequent economic activities have made it difficult for the government to monitor tax evasion. Under such circumstances, the U.S. Treasury Department and the Internal Revenue Service (IRS) has enacted Foreign Account Tax Compliance Act (FATCA), which is designed to combat tax evasion by U.S. taxpayers using non-U.S. accounts.
FATCA is a United States federal law that requires United States citizens, including individuals who live outside the United States, to report their financial accounts held outside of the United States. It also requires foreign financial institutions (FFIs) to report to the IRS about the account summary of their U.S. clients. If an individual holding any U.S. bank accounts refuses to report his/her account status, the corresponding financial institution will withhold the tax from the client or deactivate the account. For any FATCA non-compliant financial institutions, the U.S. government will levy 30% penalty on all unreported transactions. Meanwhile, U.S. and China governments have reached an agreement that they would provide the financial information of the alien residents in their countries. These policies show that the tax departments from both countries will monitor account holders from U.S. and China.
FATCA has caused a substantial concern among government bodies and FFIs worldwide. Many of them expressed that such an agreement was rather burdensome and that it may involve rather sensitive issues such as money laundry and corruption. Under such policy, FFI will find itself in conflicts with its obligations under domestic laws. For example, FATCA may conflict with local privacy laws (in the reporting of personal information). At the same time, it may take time for the FFIs to adjust the new regulation and the new reporting procedures arising from it.
With increasing global efforts in combating offshore tax evasion, more countries are willing to comply with FATCA and collaborate with the IRS. China as the world’s second largest economy is playing a crucial role in FATCA’s effective implementation in Asia. The Chinese Government acknowledges that it has become a global trend to internationalize the tax source, and at the same time such policy can help to solve the problem of tax evasion across different countries due to the “GO OUT POLICY”.
To implement FATCA, the U.S. has entered into “intergovernmental agreements: (IGAs)” with more than 40 foreign governments, including China, United Kingdom, France, Germany and Switzerland. This implies that FATCA has affected the privacy enjoyed by individuals and corporations holding Swiss bank accounts. FATCA has made overseas financial transactions more transparent and tax evasion far more difficult. In view of FATCA and its implication, our firm will help our clients to make informed decisions.
