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FATCA, Foreign Account Tax Compliance Act
FATCA, the Foreign Account Tax Compliance Act, was enacted by the US Congress in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. It's stated purpose was to reduce US tax evasion by requiring foreign financial institutions to report to the IRS on their US account holders. FATCA was a revenue raising provision added to help fund the substantive provisions of the HIRE Act and was never costed or examined by the Congressional Budget Office. The actual consequences, intended or not, were to deny banking and investment accounts to a large portion of the estimated 9M US citizens living outside of the US. FATCA is extra-territorial in application and requires Foreign Financial Institutions (FFIs) to break domestic law (especially privacy laws) in order to comply with US law - under the threat of 30% withholding on US payments if they did not comply. To work around the “problem” of domestic law interfering with US law, the US Treasury signed Intergovernmental Agreements (IGAs) with more than 100 countries.
The actual FATCA provisions are found in Chapter 4 of the Internal Revenue Code. These provisions were unenforceable as written because they required Foreign Financial Institutions (FFIs) to comply regardless of whether compliance violated domestic law in their own country. The workaround to this problem was the development of Intergovernmental Agreements (IGAs). For an overview of FATCA see this post on John Richardson's blog, Citizenship Solutions.
More Information on Wikipedia: FATCA
A transcript of the House Ways and Means Committee Hearing on FATCA (5 Nov 2009) can be found here. (discussed on FB and The Isaac Brock Society). Congressional voting on the HIRE Act can be found on govtrack.
A collection of public submissions to the US and other governments on FATCA and its implementation can be found here (includes several submissions by Australian organisations).
These pages discuss how FATCA was implemented in Australia.
FATCA Implementation and Maintenance Costs
To our best knowledge, there have been few published in-depth studies into the cost of implementing FATCA on Australian businesses nor on the Australian economy, although the sums involved are expected to be material.
Measuring the Benefits and Impact of FATCA
In Australia little has been reported on the extent of FATCA reporting. When the first batch of accounts were transmitted to the IRS, The Australian reported1) that details on more than 30,000 accounts containing more than $5billion had been transferred to the IRS. The quantity of data transferred in 2016 had not been publicly reported. Furthermore, there was no information as to the breakdown of reported accounts between resident and non-resident accounts and between individual and entity accounts.
To fill this information gap, we did an FOI request at the end of 2017 - reported on the blog here. A request to update this data was made at the end of 2018, and denied by the ATO stating that releasing this data would harm the international relations of the Commonwealth. We requested an internal ATO review which upheld the original decision. We are currently appealing the decision with the Office of the Australian Information Commissioner.
In Canada there has been an attempt to get similar information from the Canada Revenue Agency. As reported on the Isaac Brock Society website, a series of questions were officially asked in Parliament, and answered by CRA.
On the US side, The Treasury Inspector General for Tax Administration (TIGTA) published a report in July 2018 titled Despite Spending Nearly $380 Million, The Internal Revenue Service Is Still Not Prepared To Enforce Compliance With The Foreign Account Tax Compliance Act.
Israel reported that it had received information from the IRS relating to 2016 on 40,000 US accounts owned by Israelis with gross earnings of $1.08billion (WebArchive address). Note that earnings here includes “capital gains”, which is not required to be reported under FATCA. Most model 1 IGAs require the IRS to report interest and dividends, while partner countries must report interest, dividends, gross proceeds on sale of assets, and account balances.
Australia agreed to sign the FATCA IGA with the understanding that the US would, at least partially, reciprocate the data exchange. Clearly, much more information is needed to properly assess the costs and benefits to Australia of participating in FATCA. No data has been reported on what information Australia has received from the IRS that it would not have received in the absence of FATCA. The IRS is most likely turning over individual accounts reported on form 1042-S (Foreign Person's U.S. Source Income Subject to Withholding) that are reporting bank account interest – note that account balance is not reported. Rev Proc 2018-36 requires banks to report any account earning more than $10 in interest even when that interest is exempt from US withholding under section 871. Most likely, at a minimum, any 1042-S generated by a financial institution and listing Australia as the resident country would be shared with the ATO - these would report dividends, rent, etc. It is not clear whether the IRS is also sending information from 1099s with Australian addresses. The real lack of reciprocity is in the reporting of entity accounts, as US financial institutions are not required to look behind domestic entities to see whether they are controlled by non-US persons.