Costa Rica firms ready for new U.S. Tax Law
Costa Rican financial organizations are getting ready to comply with the demands of the U.S. Foreign Account Tax Compliance Act (FATCA), which went into effect this year.
The law obliges foreign financial institutions to supply information to the U.S. Internal Revenue Service (IRS) about their U.S. clients, with the aim of combating tax evasion through the use of overseas accounts.
During the coming year local agencies will be modernizing their systems so that, starting on Jan. 1, 2014, they will be able to locate U.S. taxpayers who have accounts with them and compile the information.
According to Manrique Blen, a tax specialist with the Deloitte accounting firm, the institutions will be seeking to identify which of their clients might be U.S. taxpayers. In January 2014, they will start contacting those clients requesting more information to confirm their taxpayer status. Then the firms will decide which clients should be reported to the IRS.
In 2010 the United States passed the HIRE Act, which grants incentives to employers who contract persons who have been unemployed for a certain period of time. To cover the cost of these incentives, the government created FATCA, which institutes a series of controls over international financial operations.
The information about these operations is provided by financial institutions outside the U.S. that manage the investments of U.S. taxpayers.
The law doesn’t oblige, but does invite, financial organizations all over the world to provide this information to the IRS. Nonetheless, according to Blen, there are sanctions for those who fail to comply.
“Being a U.S. law, it shouldn’t be able to oblige Costa Rican financial institutions,” he said. “However, those that don’t comply with these processes will be sanctioned by U.S. financial institutions with retentions of up to 30 percent on any payment made to a foreign financial agency that does not have an agreement with the IRS.”
Starting on March 31, 2015, local financial institutions will have to start reporting to the IRS information about their U.S. taxpayer clients who conducted transactions during 2013 and 2014. Starting in 2016, personal accounts containing more than $50,000 and corporate accounts containing more than $250,000 will be reported.
According to Blen, Deloitte is advising a large number of banks and has spoken with 90 percent of Costa Rica’s financial organizations.
“All are aware of FATCA and a large number are already implementing it,” he said. “During the rest of this year all will be making the changes to be up to date.”
“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 communiqué issued in July 2011.
“A Costa Rican financial agency will have to incur many costs to identify these people and report them to the United States, costs that won’t be recognized by the government of this country, to increase its [the U.S.’] collections and comply with its law,” said Blen.
Blen also acknowledged that one of the advantages of the law is that it allows for greater transparency in the destination of funds and the tax obligations of persons who maintain financial operations outside the U.S.
Other countries, such as Germany and Australia, are interested in implementing laws similar to FATCA. This would mean that local financial institutions would have to report not only to the IRS, but also to other countries requiring foreign financial firms to supply information.
Blen added that the IRS also offers countries the possibility of signing intergovernmental agreements, in which foreign governments send the U.S. information about the financial operations of U.S. taxpayers in their countries. Mexico was the first Latin American country to sign an agreement of this kind.
“There is a list of approximately 50 countries that are negotiating with the U.S. to sign such agreements,” he said.
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