By Geri Westphal
New tax rules will complicate tax returns of companies and employees alike.
If given a choice, would you rather spend time on growing your business or reporting details of existing business? It used to be the obvious answer was to grow the business, but with organizations inundated with hundreds of new rules, many are faced with the hard choice of giving up revenue-generating headcount for one considered a cost center in order to comply with new rules.
Two of these new rules will be particularly onerous; every foreign financial institution (FFI), corporation and partnership has the immediate obligation to examine whether, and to what extent, it must adhere to Foreign Account Tax Compliance Act (FATCA) and Report of Foreign Bank and Financial Accounts (FBAR) reporting requirements. Without a doubt, these two tax laws will be the most time-consuming compliance requests ever, as they will add increased monitoring and reporting >requirements to global treasury organizations.
I understand the initial purpose of FBAR and FATCA, but I believe the mountain of unintended consequences must be considered before real damage is done to the US economy and to US citizens.
One of the big challenges of these two tax rulings is that of interpretation. Based on recent discussions at The NeuGroup’s spring 2014 Global Cash & Banking Group meeting, opinions put members on opposite ends of the spectrum. The trouble is this sentence: “US persons…that have an interest in foreign financial accounts (or specific foreign financial assets)…” must report bank account details based on certain thresholds. The problem is “have an interest in.” Most think it means that all individuals who have access to a bank account, including those with electronic banking authority, must file the appropriate document with their individual tax return. But others viewed the ruling more broadly and are not including this full list of individuals.
Because of the continued ambiguity in the interpretation of the IRS guidelines, many organizations have decided to over-report because it is seen as the more conservative response to regulations and comes with no penalty attached. Several members are including in its lists those who have initiation authority on e-banking platforms as part of the overall FBAR reporting. Failure of an institution to comply with either FATCA or FBAR can get expensive—with outright withholding taxes or graduated penalties. But, from an individual’s perspective, the over-reporting decision means many more individuals’ IRS forms will include the new disclosure even if it is not necessary.
Having spent many years as a corporate AT with global account signing authority for hundreds of bank accounts, I can say with certainty that I am glad I don’t have to participate in this FATCA, FBAR exercise. In addition to the added time spent on the corporate side to collect and report the account signer details, I can imagine that each individual signer’s tax return has become more complicated as a result. To me, this new process seems like a huge built-in pipeline of potential audits for the IRS; both from a corporate perspective and from an individual perspective. Just because you have corporate authority for hundreds of global bank accounts, does not mean you should rise to the top of a “potential audit list” for the IRS, but my bet says you might and likely will.
Compliance is tricky
There is at least a 50/50 chance that the reporting will be done incorrectly, in which case penalties and interest could be owed. Aside from the question of who pays for the reporting errors, it is the individual’s tax history that suffers with the potential of a perceived failed audit. I just don’t think this is time (or money) well spent. There must be a more efficient way of preventing the perceived tax evasion the IRS is trying to avoid than to cast a net over thousands of corporate employees who are just doing the job for which they were hired.
Opponents of FATCA believe it is a bit like using a bulldozer to go after an ant hill. They believe it constitutes an overwhelming extension of US legislative overreach. Some argue that, in many cases, entities electing to comply with FATCA will find themselves in violation of local privacy laws. To solve this issue, the Treasury Department created “Intergovernmental Agreements” (IGAs) that would allow FFIs to release client account information via this government-to-government exchange so that FFIs will not need to violate privacy laws by directly releasing information to the IRS.
Seems like smoke and mirrors to me. The bottom line is that what used to be private banking information is no longer private, I don’t care how many IGAs you route it through.
Few Want to Play
Aside from the obvious increased overhead corporations must endure as a result of the added review and reporting, many believe FBAR and FATCA have the potential to significantly stall or derail the anemic growth we’ve seen in the US over the past several years.
”The FATCA threat of a 30 percent withholding tax and the potential exposure to transfer of personal data is inciting foreigners to divest out of U.S. securities and investments,” writes American Citizens Abroad, a non-profit, non-partisan organization representing Americans living abroad.
In addition, bankers’ associations from Asia to Europe have also indicated they would withdraw their investments from US financial assets “rather than enter into a direct contractual agreement with a foreign tax authority that imposes substantial new obligations…”