American tax evaders living abroad will no longer have a place to hide as the US government rolls out its Foreign Account Tax Compliance Act today.

US tax evaders living abroad will no longer have a place to hide as the US government finally rolls out its Foreign Account Tax Compliance Act today.

FATCA was signed into law in 2010 as part of the US government’s plan to curtail offshore tax evasion by encouraging transparency through the collection of information on accounts held by US citizens abroad.

The new regulation was largely introduced - at least as how is framers presented it - in response to a scandal involving wealthy US citizens and Green Card holders hiding their assets from the US government in secret Swiss bank accounts. It is mainly aimed at wealthy individuals living in low tax jurisdictions, such as Switzerland, the Cayman Islands or the Bahamas.

It requires all financial institutions outside of the US to regularly submit information on financial accounts held by American citizens to the US Internal Revenue Service. Those who are not compliant will suffer a 30 per cent withholding tax on income and gross proceeds, as of January 2015.

According to the US Treasury Department, over 77,000 banks from over 80 countries have now signed or initialised agreements, including almost all major economies. The agreements will allow banks to hand over their information to their governments, rather than directly to the US government.

US Senator for Michigan Carl Levin said that FATCA marked “a new era for tax fairness”.

“American tax dodgers will find it harder to cheat Uncle Sam by opening secret bank accounts in offshore tax havens. While the battle to tighten FATCA and close its disclosure loopholes will continue, today marks a big win for hard-working, honest Americans who are sick and tired of picking up the tab for tax dodgers hiding money offshore,” said Levin.

Criticism

FATCA has come in for heavy criticism due to the increased financial burden that it places on foreign financial institutions at a time when firms are trying to recover from the 2008 market crash. As a result, significant requirements for registration, due diligence and reporting have forced entities to change operating models, invest in technology and spend more in order to meet compliance costs.

This has led to some foreign financial institutions electing to no longer serve US citizens in order to cope with the stricter requirements. German banking giant Deustche Bank recently asked US clients in Belgium to close their accounts and transfer them to rivals to comply with new US rules, while in the UK, HSBC has also pledged to close accounts for US clients.

FATCA has also had a huge impact on offshore jurisdictions and was recently referred to by Pascal Saint-Amans, head of the Organisation for Economic Cooperation and Development’s unit fighting tax havens, as “the earthquake that has collapsed the dam”.

John Spellman, director of financial services for the Isle of Man government, told this publication last month that offshore jurisdictions unable to cope in the new regulatory environment could fall by the wayside unless they adapt.

“The premier jurisdictions will be able to meet the international standards no matter how high the bar is set, and the Isle of Man will be there. There are certain financial centres that won't be able to meet the new demands and they will fall away in the coming years,” said Spellman.

Citizenship

Nigel Green, chief executive of global consultancy firm the deVere Group, described the legislation as “imperialistic” and said that it was a “dark day for US expats and firms operating globally”.

“It is claimed by its proponents that this new tax act is designed to catch tax evaders who illegally shelter money offshore. This is a noble aim. But FATCA cannot possibly tackle this important global issue effectively due to its dragnet, untargeted approach,” said Green.

It has been suggested that the US crackdown on tax evasion has prompted some Americans living abroad to give up their citizenship.

According to Treasury Department figures published in the Federal Register last year, 3,000 US citizens handed in their passports - three times the average of the past five years. While the Treasury has given no reasons for why they handed back their passports and green cards, many observers believe that the dramatic spike over previous years is due to them wanting to avoid paying taxes as a result of FATCA.

In the first quarter of 2014, 1,001 Americans gave up their passports or green cards, an increase of 47 per cent on the same period last year. It is also expected that a record number of US citizens will give up their passports this year, meaning more than 3,000 are forecast to do so before the end of 2014.

Green believes that FATCA brands Americans who choose to live or work overseas as “financial pariahs” and has led to US expats routinely being rejected from foreign financial institutions because FATCA’s “costly and onerous” regulations means Americans are now deemed more trouble than they are worth.

“Similarly, American businesses working in international markets are now often branded with a leprosy-like status. Clearly, this can only be detrimental to their global competiveness and could, in turn, hit American jobs and the long-term growth of the US economy – which would then, of course, have far-reaching consequences beyond the US,” said Green.

Russia and China

Last week, China reached an agreement in principle with the US for FATCA, while Russian president Vladimir Putin signed a law yesterday that will allow Russian banks to pass on information about their American clients to the US Inland Revenue Service.

Russia and the US intended to sign an intergovernmental agreement to facilitate the implementation of FATCA earlier this year, but this was halted by the US following Moscow’s annexation of Crimea in March.

Russian lawmakers drew up the legislation in absence of an intergovernmental agreement to ensure that financial institutions were still able to comply with FATCA, as by law Russian financial institutions are not allowed to share their information with foreign countries. The move will please Russia's banks, which will now avoid having to pay a penalty of a 30 per cent withholding tax on certain US sourced payments, including deposits.

Hugo Jenney, head of tax at international law firm Stephenson Harwood, said that people who have complied fully with their US tax filing obligations should have nothing to fear, while those that have not face difficult choices on which they will need professional advice.

"The UK and other governments are following in the wake of the US. Also starting from 1 July 2014, similar information exchange provisions in relation to UK accounts will affect financial institutions in Crown Dependencies and Overseas Territories with which the UK has entered into FATCA style agreements," said Jenney

"Other countries are following suit and, in time, one may envisage that there will be only a few non-compliant territories left which will be practically useless for tax structuring as other countries will apply withholding taxes to payments to entities in such countries,” he added.