Pearse Trust Blog

Further to our recent blog posts Does FATCA affect your business? and FATCA for the UK?, we are now able to provide an overview of the key implementation timelines for due diligence and other requirements under FATCA, following the release of IRS Announcement 2012-42.

Revisiting FATCA 

In our recent blog post Does FATCA affect your business?, we provided an overview of the US FATCA legislation and the resulting obligations, when it comes into force on 1 January 2013.

Background to FATCA

The Foreign Account Tax Compliance Act (FATCA) is U.S. tax legislation which comes into legal force on 1^st January, 2013. This new legislation was enacted by the Hiring Incentives to Restore Employment ("HIRE") Act 2010.

Commentary in the media suggests that many US companies are using a structure called the “Double Irish Dutch Sandwich” to reduce their worldwide taxation liabilities connected with Intellectual Property (IP). The companies said to be using this structure include Apple, Facebook, Google, Microsoft, Oracle Corp and Pfizer Inc. The structure utilises advantageous taxation rules in Ireland and the Netherlands to limit the taxation payable on flows of royalty income generated from IP, and is also tax efficient from a US perspective.

The Bank Secrecy Act was passed into law in the United States in 1970 in an attempt to combat money laundering in the US As a result of this Act, foreign financial accounts including bank accounts, brokerage accounts, mutual funds, unit trust and other financial accounts came under scrutiny as the United States Government became wary of United States persons utilising these accounts outside the US in an attempt to evade more stringent US laws. The Internal Revenue Service (IRS) began to enforce the disclosure of such foreign financial accounts by means of the Report of Foreign Bank and Financial Accounts (FBAR).

The Facts

Lehman Brothers International (Europe) (LBIE), the principal European trading company in the Lehman Brothers group, regulated by the Financial Services Authority (FSA), was placed in administration in 2008, following the bankruptcy of Lehman Brothers Holdings Inc. The administrators sought the assistance of the UK Supreme Court to interpret the FSA’s Client's Assets Sourcebook Chapter 7 (CASS7) and the treatment of funds that had been paid to LBIE before it entered administration.

Two years ago, the United States and Western Europe were in the same boat: a recession on a scale that had not been seen since the 1930s. With images of the Dust Bowl swirling in the minds of lawmakers, the US, the United Kingdom, and the Eurozone took different tactics to attempt to pull their economies out of the recession. The US adopted Keynesian economic principles; namely, they tried to spend their way out of the recession. The UK and the Eurozone took a different tactic: cut spending. There are merits to each plan, even though they are at the opposite ends of the economic spectrum.

Lately, a vocal group of wealthy people have been calling for more taxes on the rich.  From billionaire Warren Buffett in the States to L’Oreal heiress Liliane Bettencourt and other French high-earners asking the wealthy to pay more taxes on their incomes in order to help pull their countries out of debt, it’s inevitable that leaders will listen – and raise taxes.  France announced a 3% tax increase on its top earners, and Italy followed suit.  After plenty of debate, Italians earning over €500,000 annually will pay an extra 3%.  Italy’s move is largely symbolic, however; only 4,437 Italians declared €500,000 or more on their tax returns.  Spain is considering a similar measure, a 2% increase on high earners to raise €1.2 billion.

In recent years, in an effort to crack down on international money laundering and tax evasion, nations like the United States, Germany and the UK began investigating just how widespread the practice was. With the assistance of international organisations like the Financial Action Task Force (FATF) and the Organization for Economic Co-operation and Development (OECD), US and European Governments began putting pressure on not only the Swiss, but also tiny Liechtenstein and small Caribbean island nations.

The US FATC Act

The US Foreign Account Tax Compliance Act (FATCA), due to come into force in 2013, will in its current form require overseas financial institutions to report American clients with accounts of more than USD$50,000 to the Internal Revenue Service.