What is the 'Foreign Account Tax Compliance Act (FATCA)'

The Foreign Account Tax Compliance Act (FATCA) is a tax law that compels U.S. citizens at home and abroad to file annual reports on any foreign account holdings. FATCA was endorsed in 2010 as part of the HIRE Act in order to promote transparency in the global financial services sector.

BREAKING DOWN 'Foreign Account Tax Compliance Act (FATCA)'

The Hiring Incentives to Restore Employment (HIRE) Act was signed into law by President Barack Obama in 2010 to incentivize businesses to hire unemployed workers so as to reduce the high unemployment rate that was brought about by the 2008 financial crisis. One of the incentives offered to employers through the HIRE Act include an increase in business tax credit for each new employee hired and retained for at least 52 weeks. Other incentives include payroll tax holiday benefits and an increase in a firm’s expense deduction limit for new equipment purchased in 2010.

In order to fund the costs of these incentives, Congress included revenue-generating provisions in the HIRE Act through FATCA. FATCA provisions require all U.S. taxpayers to report yearly all assets held outside of the country. By taxing these foreign-held assets, the U.S. increases its revenue stream, which is put towards its incentive account for job stimulation. Penalties are imposed on U.S. residents who do not report their foreign account holdings and assets that exceed $50,000 in value in any given year.

Non-U.S. Foreign Financial Institutions (FFI) and Non-Financial Foreign Entities (NFFE) are also required to comply to this law by disclosing the identities of U.S. citizens and the value of their assets held in their banks to the Internal Revenue Service (IRS) or the FATCA Intergovernmental Agreement (IGA). FFIs that do not comply with the IRS will not only be excluded from the U.S. market, but will also have 30% of the amount of any withholdable payment deducted and withheld from them as a tax penalty. Withholdable payments in this instance refer to income generated from US financial assets held by these banks and include interests, dividends, remunerations, wages and salaries, compensations, periodic profits, etc. FFIs and NFFEs that agree to the law must annually report the name, address, and tax identification number (TIN) of each account holder that meets the criteria of a US citizen; the account number; the account balance; and any deposits and withdrawals on the account for the year.

Although the price to pay for not complying with FATCA is high, compliance costs are also high. TD Bank, Barclays and Credit Suisse reportedly spent millions of dollars in fighting this law given that they faced compliance costs of about $100 million. Large banks like HSBC, Commerzbank, and Deutsche, following the enactment of the law, either limited the services offered to Americans or completely stopped serving U.S. investors in an effort to mitigate the high compliance cost.

FATCA seeks to eliminate tax evasion by American individuals and businesses that are investing, operating, and earning taxable income abroad. While it is not illegal to control an offshore account, failure to disclose the account is considered illegal since the US taxes all income and assets of its citizens on a global scale.

  1. IRS Publication 54

    A document published by the Internal Revenue Service that outlines ...
  2. IRS Publication 514

    A document published by the Internal Revenue Service that provides ...
  3. Income Tax

    A tax that governments impose on financial income generated by ...
  4. Withholding

    The portion of an employee's wages that is not included in his ...
  5. Accounting Control

    An accounting control is a set of procedures that are implemented ...
  6. Withholding Tax

    A withholding tax is a tax that is withheld from employees' wages ...
Related Articles
  1. Taxes

    How New Offshore Bank Rules Will Affect Americans

    FATCA is being implemented in 2013. Here is how it will affect the personal banking and taxes of Americans who hold offshore bank accounts.
  2. Investing

    Investing While Living Abroad as an Expatriate

    The Foreign Account Tax Compliance Act has made it harder for expatriates to invest while overseas.
  3. Managing Wealth

    What Taxes Do I Owe On Retirement Accounts Abroad?

    If you're a U.S. retiree, but previously worked abroad, here's what you need to know about taxes on foreign pensions and retirement accounts.
  4. Taxes

    Understanding taxation of foreign investments

    Find information on taxation of foreign investments. Learn how the foreign tax credit enables you to deduct most of the tax you've paid abroad.
  5. Retirement

    Things to Consider Before Retiring Abroad

    While moving abroad can stretch your retirement dollars, it can also make handling finances harder.
  6. Investing

    Frozen IRAs and Pensions Trouble Americans Abroad

    U.S. expats are having their pensions and IRAs frozen since the enactment of FATCA.
  7. Managing Wealth

    When Offshore Banking Makes Sense for U.S. Expats

    For U.S. expats who have trouble opening bank accounts overseas, offshore banking can be a solution.
  8. Financial Advisor

    Living Abroad in Retirement: Can You Afford It?

    These are the financial implications of retiring abroad, as well as what you need to consider in order to do so.
  9. Taxes

    How to Reduce U.S. Taxes on Foreign Income

    IRS rules allow for a few ways to reduce taxes on foreign-earned income.
  10. Taxes

    How the GOP Tax Bill Affects You

    Here's how the new tax bill changes the taxes you file in 2018.
  1. How much will it cost to hire an accountant to do my taxes?

    Find out how much it costs to hire an accountant and what benefits and services you can expect from your accountant. Read Answer >>
Hot Definitions
  1. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  2. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  3. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  4. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  5. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  6. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
Trading Center