When investing outside of the United States, U.S. taxable investors must now confront multiple new international tax laws. This includes the U.S. Foreign Account Tax Compliance Act (FATCA) law and the Organization for Economic Co-operation and Development (OECD) Common Reporting Standard (CRS). Both laws present significant structural changes as part of government efforts to improve global tax compliance.
Collectively, countries are learning that they may make more money working together rather than apart. FATCA and CRS increase the information government tax authorities share with each other. These initiatives mostly affect global financial institutions, however individual investors are also indirectly affected. This article identifies key concerns related to CRS and FATCA for U.S. expats, green card holders, and other U.S. taxpayers with foreign financial assets.
What is the Foreign Account Tax Compliance Act (FATCA)?
The Foreign Account Tax Compliance Act (FATCA) is a U.S. law passed by Congress in 2010. The main goal of FATCA is to identify U.S. taxpayers who are using non-U.S. financial accounts to evade paying income taxes. FATCA receives information on U.S. taxable persons through several methods.
Primarily, FATCA turns foreign financial institutions into reporting agencies for the U.S. Internal Revenue Service (IRS). Foreign banks are now required to provide information on their U.S. citizen clients to the IRS through information sharing agreements. Initially, many foreign banks found it easier to remove U.S. citizen clients than to give the IRS information. This caused many Americans living abroad to lose local banking services. Ultimately, most foreign banks complied with FATCA and now supply the IRS information on their U.S. taxable account holders.
On an individual level, FATCA does not directly impose any taxes. The FATCA law only increases the amount of information the IRS receives on taxpayer assets. U.S. taxpayers now have an obligation to file IRS Form 8938 (FATCA form), which broadly requires reporting of foreign financial assets including holdings such as non-U.S. businesses and partnerships. This form is in addition to the U.S. FinCEN 114 (FBAR) form that needs to be filed if a taxpayer has foreign financial accounts holding greater than $10,000. In coordination with citizenship-based taxation, where the United States imposes taxes based on citizenship rather than residency, the increased visibility on foreign financial accounts is predicted to increase tax revenue and penalties associated with not filing.
Global FATCA: OECD Common Reporting Standard (CRS)
In addition to FATCA, American expats and global investors now must confront another new tax law. The Common Standard on Reporting and Due Diligence for Financial Account Information (CRS) is a global standard proposed by the OECD for the cross-border exchange of information on financial accounts. Due to many similarities that the CRS shares with FATCA, it is informally referred to as GATCA (the global version of FATCA).
There is an evolutionary relationship between FATCA and CRS, but they are very different laws. CRS proposes much broader information sharing between financial institutions and foreign governments. Information on account holders and account balances must be shared by banks to governments in signatory jurisdictions. Close to 100 countries worldwide agreed to share information with each other under CRS.
Interestingly, the United States is not part of any CRS agreement. U.S. financial institutions may provide very limited information to foreign governments on account holders under U.S. federal law. As a result, international investors and American expats will likely not have their U.S. financial account information shared with foreign governments’ tax authorities.
What does FATCA and CRS mean for U.S. Investors?
For U.S. investors, the world is getting much smaller. The IRS now has access to vast amounts of financial information through technology and information sharing. Other countries are accomplishing much of the same through the new CRS regulations. Non-compliance with international tax laws can no longer be ignored.
For example, with FATCA reporting, the IRS may be able to identify American expats owning non-U.S. listed mutual funds (passive foreign investment companies, “PFICs”) or foreign pensions. The IRS is also starting to aggressively target taxpayers who have not properly reported their foreign investments. There have even been reports of the United States not renewing passports when they can identify tax non-compliance. U.S. intergovernmental agencies are now clearly working together.
Using CRS, foreign governments (particularly in Europe) are receiving vast amounts of data on their tax residents’ ownership of bank accounts around the world. These tax authorities are actively using this information to enforce their local tax laws and penalize individuals who were not previously in compliance. Moving forward, it is essential to report all investments to the United States and country of residence to avoid steep penalties, interest, and professional fees down the road.
Global Wealth Management with FATCA and CRS Rules
FATCA and CRS amplify the need for cross-border investors to focus on proper tax compliance. The world is becoming a more difficult place to invest across multiple jurisdictions. There are more rules to be considered, and the existing rules are being enforced more strictly.
For non-compliant taxpayers, this can be a major problem, but this should not cause fear of investing abroad. Taxpayers with foreign investments that are properly compliant with their tax obligations do not need to be concerned about penalties. Investors should not let informational reporting stand in the way of their investment goals. Round Table Wealth Management is a U.S. SEC-registered firm working with clients globally of many nationalities and residency. This includes working as a financial advisor for American expats. We help clients create compliant and tax efficient long-term investment strategies for the global family.