America, unlike other countries, operates a universal tax system, meaning that all U.S. citizens must pay taxes, regardless of whether they live in the United States. As such, the estimated six million U.S. citizens living abroad are required to file tax returns just as if they were living on U.S. soil.
Congress estimates that more than $100 billion a year is lost in unpaid taxes from citizens living overseas, a small percentage of whom may attempt to “hide money” where the U.S. government can’t see it. A new law designed to prevent illegal tax evasion, however, is having a detrimental impact on U.S. citizens who are living perfectly legally in foreign countries. The Foreign Tax Compliance Act (FATCA) was signed into law in 2010 and, beginning July 2014, will require all foreign financial institutions holding assets or income from U.S. citizens worth more than $50,000 to report it directly to the IRS. The U.S. has said it will withhold 30% of interest payments and dividends due to overseas banks and institutions as a penalty for noncompliance. This, in turn, has prompted some foreign banks to turn down Americans as customers, sending waves of concern through expat communities around the world. The concept that banks would turn away money for fear of IRS sanctions might have seemed ludicrous only ten years ago – now it seems to be a reality. U.S. citizens living outside the States have also voiced concerns about the hefty cost of hiring accountants or other specialists to help files their taxes.
The intention of FATCA was never, of course, to harm U.S. citizens living abroad, but rather to make it harder to evade paying income taxes. A September article in the National Post, however, sums up criticism of the law, saying that “the rules create an incentive for foreign employers to cease investing in America, avoid hiring Americans, or both. And in some cases, Americans have been refused employment or promotions at foreign companies because the job description requires them to be signatories on the company’s account.”
A BBC report also highlighted the sharp increase in those renouncing their U.S. citizenship after becoming frustrated with the complexity of the tax system and the burden FATCA places on citizens residing in foreign countries. The number of citizens giving up their U.S. passports rocketed to 1,131 in the second quarter of 2013, compared to just 189 in 2012.
It has always been important to accurately report foreign income. Any income – whether from salary, investments, royalties, or business transactions – must be reported to the IRS for taxation. As the IRS itself points out, “not reporting income from foreign sources may be a crime.” (See “Income from Abroad is Taxable.”) Criticisms of the Foreign Tax Compliance Act focus on the U.S. government’s imposition of its rules on foreign banks and the explicit threat, described as ‘bullying’ in a New York Times report, to punish any who do not conform – rather than the fact that taxes must be paid.
In 2013, Senator Rand Paul (Kentucky) introduced a bill to repeal anti-privacy provisions in the Act, calling it a “textbook example of a bad law that doesn’t achieve its stated purpose but does manage to unleash a host of unanticipated destructive consequences.” Sen. Paul continued:
“Tax evasion is a problem that should be addressed, but not in such an egregious way. FATCA violates important privacy protections, disregards the sovereign laws of other nations and will cost the U.S. economy hundreds of billions of dollars in compliance costs.”
At the moment, however, FATCA looks set to come into full force next year, leaving many U.S. citizens living abroad fearful that the expense and burden of the universal tax system could make retaining their U.S. citizenship almost more trouble than it’s worth.
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via Business 2 Community http://www.business2community.com/trends-news/changes-tax-laws-hit-u-s-citizens-living-abroad-0698847?utm_source=rss&utm_medium=rss&utm_campaign=changes-tax-laws-hit-u-s-citizens-living-abroad
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