The Foreign Account Tax Compliance Act (FATCA) became law in the United States in 2010. The provisions of the law focus on reporting for both U.S. taxpayers and foreign financial institutions to prevent tax evasion by U.S. citizens and residents through the use of offshore accounts. U.S. individuals must report information about certain foreign financial accounts and offshore assets on their income tax return if the total value exceeds certain reporting thresholds. The law also requires foreign banks and other financial institutions (like investment and insurance companies) to give information to the IRS about Americans’ accounts worth more than $50,000. If the foreign bank or financial institution fails to enter into an agreement with the IRS, all relevant U.S. sourced payments will be subject to a 30% withholding tax.
From a recent article published in the Financial Advisor, it appears that this law is having an unintended consequence: foreign banks are turning American clients away, even if they are U.S. expatriates living in and being paid in that foreign country by their U.S. employers. In the article, one such expatriate received a notice from Deutsche Bank that her account was being closed. Many of the account-closing complaints are coming from Americans living in Switzerland, which is most likely due to Swiss banks failing to meet the reporting requirements. UBS paid a $780 million fine to the IRS for failure to disclose information on American accounts and just this May Credit Suisse was fined $1.2 billion for similar charges. With American expats numbering between 5 and 6 million, this could become a potential nightmare for those individuals with limited options to open or maintain a foreign bank account.