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Offshore Banking and FACTA: What You Need to Know

FATCA and international banking

Whilst America’s Foreign Account Tax Compliance Act (FACTA) has been around since March 2010 when it was enacted, the main provisions of it came into effect in July two years ago.  So now that these provisions have bedded in and data has been flowing for well over a year, what do you need to know about offshore banking and FACTA as an expat?

In this report we cover the FACTA basics, explain who they affect and how, discuss how international banks and financial institutions have reacted to FACTA, as well as examining the impact on expatriates around the world.  We identify any open concerns you may need to be aware of if you hold an offshore bank account – whether you’re American, a resident in the US, or simply an expat who has no ties with the US whatsoever.

Whilst the Foreign Account Tax Compliance Act was allegedly only introduced to clamp down on illegal taxation avoidance activities, it’s clear that the legislation has actually had far-reaching ramifications for legitimate offshore bank account holders from all nations, and in some circumstances it has caused significant problems for international bank account holders including British expatriates.

FACTA Basics

FATCA was enacted in March 2010, became effective in January 2013, and the main provisions began impacting affected persons in July 2014.

The Act requires reporting of information regarding offshore accounts and investments held by US persons to the IRS – however, the IRS has been tinkering with the regulations ever since, and they have been impacting British expats who don’t even have ties with America, as well as expatriates and foreign account holders around the world.

All foreign financial institutions which may be included within the remit of the Act have been twitchy, cautionary and in many case, over reactionary ever since.

As a direct result some bank accounts have been closed with no warning, account holders have been refused access to their own funds, some institutions have been refusing new customers who are non-resident in their country of domicile (e.g., Britons living abroad), and doing international money transfers for many people has become much more difficult.

There are many reports of Americans living abroad giving up their US citizenship to avoid the effects of FACTA, so limiting are the effects on their financial life.

Why is Everyone Afraid of the IRS?

The basic facts are that America taxes its citizens, green-card holders and residents on income earned anywhere in the world, and imposes complicated reporting requirements on them.

Those who fail to comply or who fail to understand reporting requirements and who get things wrong face severe financial penalties.

When it comes to the IRS and FACTA, all foreign financial firms have to cooperate with the new reporting rules, because if they don’t they and all their account holders could be docked 30% of payments such as interest and dividends from US sources.

As you can imagine, the costs to foreign financial firms whether they comply or not are very high.

The compliance, record collection, data management and information sharing costs are immense – and the financial penalties for failing to comply or getting a single step in terms of reporting wrong are even worse.

The threats the IRS pose are real – hence everyone’s natural fear of them.

What’s the Impact of FACTA?

Foreign financial firms have completely capitulated to the pressure of Uncle Sam and the IRS.  They have signed up to FACTA in their droves because the financial and business risks of not doing so are crippling.

However, they have passed on the stress they are now under to their account holders in many cases.

Account minimums have been raised to cover costs, any accounts with even potential and extremely tenuous links to America have been purged, in some cases with no warning leaving account holders locked out of their funds, or unable to open another bank account.

It’s not just Americans who have been impacted.  Where an expatriate client has been identified, in some cases their accounts have been impacted in this way simply because the bank does not want to run the risk that the client has any US ties.

The banks cant be bothered to do the required client due diligence, and they certainly can’t be bothered to suffer the consequences of not having done so.  It’s far easier to simply purge accounts.

In the UK even NS&I closed all accounts of customers who could potentially be affected by FACTA, because they said the administrative costs would otherwise be totally disproportionate.

The IRS has now made it so complicated for anyone who needs to fill in an American tax return that professional advice is needed in almost every case.  This leads to high and in many cases unnecessary costs for normal expats who have the misfortune of having been born in America, or having ties to the US such as a residency visa.

In other words, far too many innocent victims have been caught in FACTA’s crossfire.  But does the IRS care about this?  Nope – it considers it collateral damage.

British Connections to FACTA

If you fall into any of the following categories you are highly likely to be affected by FACTA, this list is not inclusive: –

– American citizens living in the UK
– British citizens living in the US
– British residents with an American address including a correspondence or business address
– Anyone with an American telephone number
– Anyone who regularly transfers funds to American accounts
– Britons born in American
– Those who travel regularly to the US
– Britons who own a second home or investment property America
– People who have set up a trust (whether or not there is an American connection)

Almost anyone can become an accidental American when it comes to FACTA: expatriates are at risk.

Should You Close Your Offshore Bank Account?

If you are not American and not a green-card holder and you legitimately hold any bank account, savings product or investment solution offshore or internationally, you should not need to take any action whatsoever to protect yourself from the effects of the Foreign Account Tax Compliance Act.

However, the effects may still impact you if your financial institution decides to purge or lock accounts.  The majority of reactionary decisions have now been made and enacted however, therefore if you remain unaffected to date, chances are you’re safe.

If you have any concerns whatsoever you’re strongly advised to seek professional advice.  This may be from your offshore bank, your financial advisor or a tax specialist.

FACTA is not going away.  What’s even more worrying is that countries like the UK are copying America’s lead and considering the implementation of similarly aggressive rules.  We will keep you up to date on this.

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