In my first blog post I addressed the concern that compliance by foreign financial institutions (“FFI”) with the Foreign Account Tax Compliance Act (“FATCA”) could led to a draconian move by FFIs to simply drop all U.S. account holders and clients.
That concern is becoming a reality. In February of 2014, AXA bank informed its patrons that it was terminating relationships with its account holders who are U.S. citizens or residents.
No doubt AXA, like other foreign banks, is concerned with making sure it is in full compliance will all the mechanisms of FATCA. Remember that if an FFI fails to properly adhere with FATCA requirements, an FFI faces a 30 percent withholding obligation with regards to financial transactions on investments held by U.S. account holders.
Consider the following example borrowed from the VDP Law Group demonstrating why FFIs want to insure they are 100 percent compliant with FATCA.
A U.S. citizens residing in France trades stocks on the New York Stock Exchange through a French FFI via a brokerage account. The investor’s FFI conducting the purchase of the stocks is not compliant with FATCA. The FFI buys 10,000 shares of XYZ stock at $25 per share on day 1. On day 2, XYZ stock increases to $26 per share. The FFI sells and collects $10,000 profit. However, because the FFI is FATCA non-compliant, the IRS withholds 30 percent of the whole sale, not just the profit. The client receives $260,000 minus 30 percent, or $182,000. The $250,000 investment becomes $182,000. The U.S. citizen only gets the withholding by filing a U.S. income tax return.
Under 26 U.S.C. §1471, the FATCA withholding obligation is on the FFI and failure to properly implement the 30 percent withholding can lead to upwards of $50,000 worth of penalties. (Not to mention the exchange of information requirements!) In addition to this, the taxpayer has an obligation to file form 8938, reporting the brokerage account, and must file FinCen Form 114, commonly referred to as FBAR, also reporting the brokerage account. Needless to say, the prospect of dumping U.S. clients to avoid dealing with FATCA looks very attractive for many FFIs.
Last week, during a hearing held by the Permanent Subcommittee on Investigations, Credit Suisse, Switzerland’s second largest bank, reported that it had spent nearly $100,000,000 to implement FATCA and that so far for 2014 it was spending between $40,000,000 and $45,000,000 to continue their FATCA compliance.
AXA, like Credit Suisse, is a large FFI and would most likely have to spend equal to what Credit Suisse has been paying to become compliant with FATCA. The truth is that spending that kind of money to be compliant with only one country for a group of clients that do not represent a large percent of the banks’ clientele is not a sound investment. AXA would undoubtedly have to pass FATCA compliance costs down to all its clients, including non-U.S. clients, running the risk of alienating them as a result of higher fees.
AXA is not the only one dropping its U.S. clients. UTI International, based out of Singapore, has “had to remove American investors because of the compliance burden Foreign Account Tax Compliance Act (Fatca) brings.” UTI stressed the fact that it was not willing to pass the burden of increased costs to be compliant with FATCA onto to the rest of its non-American clientele.
Is FATCA really leading to more fluid exchange of information between the U.S. and foreign FFIs or is it pushing FFIs away from dealing with the United States? I’ll let you decide.
Posted March 11, 2014