FATCA Bilateral Agreement: Everything You Need to Know
Foreign Account Tax Compliance Act (FATCA) is a US law that requires foreign financial institutions to report information about the US taxpayer`s account to the Internal Revenue Service (IRS). The law was enacted in 2010 as a part of the Hiring Incentives to Restore Employment Act (HIRE).
FATCA was enacted to combat tax evasion by US taxpayers using offshore accounts. The law requires foreign financial institutions to identify and report the US taxpayer`s account information to the IRS. Failure to comply with FATCA could result in penalties and sanctions.
However, the burden of compliance with FATCA was deemed too high for foreign financial institutions by the global financial community. To address this issue, the US government entered into bilateral agreements with foreign countries to streamline the process and reduce compliance costs for banks.
What is a FATCA Bilateral Agreement?
A FATCA bilateral agreement is a pact between the US government and a foreign government. The agreement establishes a framework for foreign financial institutions to comply with FATCA requirements while minimizing compliance costs.
Under the terms of the agreement, foreign financial institutions would identify and report information about US taxpayers` accounts to their local tax authority. The local tax authority would then send the information to the IRS.
The agreement also allows for reciprocity, where the US government will provide the foreign country`s tax authority with information on their citizens` accounts held in US financial institutions.
Benefits of a FATCA Bilateral Agreement
The FATCA bilateral agreement has several benefits for both the US and foreign governments.
Firstly, the agreement strengthens tax compliance and transparency between the US and the foreign country. It enables the US government to receive information on US taxpayers` accounts held in foreign financial institutions, reducing tax evasion and offshore tax haven abuse.
Secondly, the agreement reduces the burden of compliance for foreign financial institutions. By reducing compliance costs, banks are more likely to comply with FATCA requirements, increasing the amount of information available to the IRS.
Thirdly, the agreement increases global tax cooperation, improving the effectiveness of international tax compliance efforts. It also helps in preventing the proliferation of financial crimes and terrorist financing.
FATCA Bilateral Agreements and their Implementation
The US government has signed FATCA bilateral agreements with over 110 jurisdictions worldwide. The agreements vary in their implementation and reporting obligations, such as the use of different data formats and reporting thresholds.
Foreign financial institutions are required to comply with the reporting requirements set out in the bilateral agreement. Failing to comply could result in penalties, including withholding taxes on US source income.
FATCA bilateral agreements are a crucial part of the US government`s effort to combat tax evasion. The agreements aim to improve tax compliance, increase transparency, and reduce compliance costs for foreign financial institutions. It also strengthens global tax cooperation and combats financial crimes. With over 110 bilateral agreements signed so far, the US government has made significant progress in implementing FATCA worldwide.