U.S. tax officials eye offshore accounts
Starting in 2013, Costa Rican banks will be obligated to report to the United States Internal Revenue Service (IRS) on accounts held locally by U.S. citizens and businesses.
The new reporting requirement for foreign financial institutes (FFIs), as the IRS refers to them, are part of the Foreign Account Tax Compliance Act (FATCA), which the IRS says is aimed at U.S. taxpayers who avoid paying their due by keeping their holdings in accounts outside the U.S.
“FATCA is an important development in U.S. efforts to combat offshore noncompliance. At the same time, the IRS recognizes that implementing FATCA is a major undertaking for financial institutions,” said IRS Commissioner Doug Shulman in a statement issued in July, when a plan to phase in the new law was announced.
“Today’s notice is a reflection of our serious commitment to implementation of the statute, but also a serious commitment to listen to the implementation challenges of affected financial institutions and make appropriate adjustments to ensure a smooth and timely roll-out.”
FATCA is part of the Hiring Incentives to Restore Employment Act, an initiative passed in the U.S. in 2010. The law requires FFIs, such as Costa Rican banks and investment funds, to disclose information to the IRS about accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers have a “substantial ownership interest.”
The stick that could come down on FFIs for refusing the IRS carrot is withholding on certain types of transactions such as “U.S. source interest and dividends, gross proceeds from the disposition of U.S. securities, and pass-through payments,” according to the IRS.
To avoid missing out on these goodies, the IRS is requiring financial institutions in Costa Rica to enter into an contract with the IRS whereby the institutions agree to identify U.S. accounts, report on those accounts to the IRS and to withhold a 30 percent tax on payments to other financial institutions or account holders who refuse to fall in line with FATCA requirements.
Denise Hintzke, director of financial services at Deloitte, a global accountancy firm, said the brunt of the burden to comply with FATCA falls on the shoulders of FFIs.
“Financial institutions are vey upset about this,” Hintzke said. “But most of them are moving along with the thought that they have to come into compliance; they have no choice. I’ve heard people call [FATCA] ‘evil genius’ [because] the IRS is getting these financial institutions to voluntarily agree to do something that provides them with what they need at a relatively low cost to our government.”
The IRS is requiring that these agreements with FFIs be finalized no later than June 30, 2013. Withholding of U.S. source interest and dividends to non-compliant institutions will begin Jan. 1, 2014 with the full spectrum of withholdings going into effect at the start of 2015.
“What we’re telling FFIs that they really should be doing now is going through an analysis of their business to identify how they’re impacted by this,” Hintzke said.
The U.S. Treasury Department is currently working on laying out the full set of regulations FFIs will have to adhere to be in compliance with FATCA. Hintzke said she expects a draft of those to be available in the next six to eight weeks with a full, finalized version prepared by mid-2012. That would leave FFIs about a year to prepare.
“The interesting thing here though,” she said, “is that because it has a statutory date of Jan. 1, 2013, it becomes effective whether or not those regulations come out. So everybody is very worried about getting this additional guidance in a timely basis.”
Hintzke said she has visited 67 countries recently discussing the impacts of FATCA, and that despite initially bristling at the new obligations and up-front expense, most governments and financial institutions are resigned to jump through these new hoops to maintain access to U.S. markets.
“If you look at it in its broadest terms, any financial institution that wants to continue to play in the normal financial markets probably needs to come into compliance,” Hintzke said.
As for how this will affect U.S. citizens living or managing assets abroad, Hintzke said to prepare for more paperwork, and possibly extra charges from financial institutions to cover the new reporting obligations.
“FATCA is a reporting regime,” Hintzke said. “As long as you were doing what you were supposed to be doing, it doesn’t change the law as to what you were taxable on. It’s just making sure the U.S. government has the information to make sure you’ve been properly disclosing.”
For all this effort, Hintzke said, the U.S. Treasury, IRS and U.S. Congress expect to recuperate some $8.7 billion in unpaid taxes.
You may be interested
Surge in young migrant border arrivals poses challenge for United StatesLaura BONILLA / AFP - March 6, 2021
Thousands of minors without papers are arriving at the US border with Mexico, presenting President Joe Biden with a potentially…
Six arrested in Costa Rica with 1.1 metric tons of cocaineAFP and The Tico Times - March 6, 2021
Costa Rican authorities seized 1.1 metric tons of cocaine and detained six men — four Colombians and two Costa Ricans…
One year after first case, Costa Rica to broadcast Covid memorialThe Tico Times - March 5, 2021
Costa Rica confirmed its first coronavirus case on March 6, 2020. By the end of the month, the country had…