The Foreign Account Tax Compliance Act (Fatca) will have big implications for firms outside the US, and will add to the compliance work of an already heavily regulated sector.
The act will require foreign financial institutions – of every type and description – to identify US account holders and report annually to the US Internal Revenue Service (IRS), or face a 30% witholding tax on payments of US source income or capital, whether it is made to the institution or for clients.
Although it is unlikely to affect many advisers, asset managers, banks and other institutions will face a huge challenge to comply.
By its own admission, the IRS says compliance will be a “complex and costly process” for institutions.
It comes as little surprise, the US Internal Revenue Service has been been chasing overseas citizens for a number of years now, with Fatca.
UK firms are to face a little relief, in the fact that the government will be able to report on behalf of firms. (blog continues below)
Of course, the US isn’t the only country to tackle tax avoidance. The UK HM Revenue & Customs has also been tasked with raising tax revenue by George Osborne.
However, perhaps the US should be taking a closer look at home at where it can raise extra revenue from.
The top rate of income tax in the US is 35% and applies to those on $388,351 (£239,099.37) or more per year (for 2012). Those on between $178,651 and $388,351 pay 33%. In the UK, the top rate is currently 50% (though it is set to drop to 45% from 2013) applies to those earning £150,000 or more.
Billionaire investor Warren Buffett recently highlighted his own tax situation, in which he recognised he paid more in taxes than his secretary (a term which has in itself raised a few eyebrows), suggesting a minimum higher rate of tax for the wealthiest people.
The Buffet Rule, as it came to be known, would have seen those earning over $1m pay at least 30% in tax. A proposal was submitted to the US legislature, but was defeated by a Republican move to prevent it from being passed. If implemented the rule would have raised $46.7 billion over the next 10 years, according to the US Congress Joint Committee on Taxation.
The so-called Buffett rule has met with a mixed response, stirring up much debate in the US. Some have agreed, others have argued that if Buffett wants to pay more tax he should get his cheque book out.
As it is a presidential election year, it’s unlikely the proposals will be revisited and should incumbent Barack Obama be defeated it is unlikely to be discussed again.