Monday, August 12, 2013

Senate Legislation Would Repeal Anti-Privacy Provisions of FATCA

Senator Rand Paul (R-KY) introduced legislation, S. 887, to repeal the anti-privacy provisions of the Foreign Account Tax Compliance Act (FATCA), which, in his view, infringe upon basic constitutional rights. He pointed out that, under FATCA, private data of anyone considered a U.S. Person under FATCA would have details of their financial assets provided to the IRS without a warrant requirement, suspicious activity report (SAR), or any allegation of wrongdoing.

FATCA would require every non-U.S financial institution, such as banks, credit unions, pension funds, stock and investment firms, to register directly with the IRS and agree to provide specified financial data on the accounts of any U.S. Person.

Passed in 2010 as part of the Hiring Incentives to Restore Employment Act (HIRE), FATCA creates a new reporting and taxing regime for foreign financial institutions with U.S. accountholders. FATCA adds a new Chapter 4 to the Internal Revenue Code, essentially requiring foreign financial institutions to identify their customers who are U.S. Persons or U.S.-owned foreign entities and then report to the IRS on all payments to, or activity in the accounts of, those persons.

The Act broadly defines foreign financial institution to comprise not only foreign banks but also any foreign entity engaged primarily in the business of investing or trading in securities, partnership interests, commodities or any derivative interests therein. According to the Joint Committee on Taxation, investment vehicles such as hedge funds and private equity funds fall within this definition. Firms meeting the definition must enter into agreements with the IRS and report information annually in order to avoid a new U.S. withholding tax

Under FATCA, the financial world is essentially divided into foreign financial institutions and US financial institutions. US financial institutions have the first compliance obligations under FATCA as the primary withholding agents for withholdable payments made to foreign financial institutions. IRS Notices 2010-60 and 2011-34 provide details regarding how participating foreign financial institutions must identify, report, and withhold on their accounts, and how US financial institutions must identify and withhold on some payments to foreign financial institutions, many details regarding US financial institutions have not yet been provided.

The Act imposes a 30-percent withholding tax on certain income from U.S. financial assets held by a foreign financial institution unless the foreign financial institution agrees to: (1) disclose the identity of any U.S. individual that has an account with the institution or its affiliates; and (2) annually report on the account balance, gross receipts and gross withdrawals and payments from the account foreign financial institutions also must agree to disclose and report on foreign entities that have substantial U.S. owners.

The U.S. Treasury has entered into intergovernmental agreements with foreign governments to facilitate the effective and efficient implementation of FATCA by eliminating legal barriers to participation, reducing administrative burdens, and ensuring the participation of all non-exempt financial institutions in a partner jurisdiction.

Senator Paul is troubled that the implementation of FATCA has allowed the Treasury Department to make independent decisions with respect to the sovereignty of foreign nations and the privacy of United States citizens. In order to implement FATCA, Treasury has initiated intergovernmental agreements, citing the intent to engage in reciprocal information sharing with other nations. Senator Paul believes that the Treasury Department, without the consent and authority of Congress, will force U.S. financial institutions to provide the bank account information of private customers to foreign nations. In his view, FATCA violates important privacy protections, disregards the sovereign laws of other nations and will cost the U.S. economy hundreds of billions of dollars in compliance costs.

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