As globalization continues to occur, governments are using measures to combat international tax evasion. As an expat, abiding by international tax policy is especially important– as hefty fines could occur. The following article goes over the two recent major developments in international tax policy as well provides a background on the international tax situation.
For a while now, governments have undergone Dual Tax Conventions and Tax Information Exchange Agreements. A Dual Tax Convention (DTC) is a double taxation agreement where countries agree on taxes for someone doing business in both of the countries. These DTCs help prevent dual taxation which can kill someone’s bottom line. In addition to DTCs, governments have been involved in Tax Information Exchange Agreements. These agreements allow countries to share information, so they can be more informed on tax information and someone’s financial happenings. However, these treaties have been tedious to enforce in the past– with some TIEA’s taking years to exchange bits of information. Naturally, new reporting standards came about. In 2010, the United States introduced FATCA.
Development 1: FATCA
Seeking a need for a new reporting standard for the IRS, the U.S.Congress passed FATCA in 2010. FATCA, which stands for Foreign Account Tax Compliance Act, is a major development in the international tax evasion policy scene. FATCA calls on foreign financial institutions, or FFIs, to report to the IRS information about financial accounts of U.S. taxpayers or foreign entities in which U.S. taxpayers hold substantial ownership interest.
So, what are the fine details of FATCA? FATCA requires U.S. taxpayers to submit Form 8938 if they hold foreign financial assets above a $50,000 at the end of the calendar year or $75,000 at any point in the year. In addition, U.S. Taxpayers who live abroad must submit this form if they hold foreign assets of $100,000 at the end of the calendar year or $150,000 at any point of the year. Keep in mind, these thresholds double when married filing jointly. FinCEN Form 114 is required if you have a financial account with $10,000 or higher at any point in the calendar year. It’s beneficial for U.S. taxpayers to file these forms if necessary because the penalties for non-compliance can be high. Failing to file Form 8938 when required to do so can result in a $10,000 filing penalty and an additional penalty of $50,000 for continued failure to file. In addition, a 40% penalty on understatement of tax attributable non-disclosed assets can occur. Failure to file FinCEN form 114 also results in penalties. The penalty for failing to file FinCEN Form 114 can be $100,000 or 50% of the unaccounted account balance (whatever is greater). Speak with your financial adviser to ensure your accounts reach the FATCA standard.
Development 2: AEOI
Just as DTFs and TIEAs were implemented and then FATCA, AEOI was the next step implemented into a global reporting standard of financial information. The AEOI, or Automatic Exchange of Information requires financial institutions to share information on their customers with respective tax administrations automatically and on an annual basis. The type of information that is shared is account balances, interest, dividends, sales, and proceeds from financial assets. Financial institutions are tasked with assembling this data and then securely transferring it to respective governments. According to the OECD (Organisation for Economic Co-operation and Development), the AEOI will enable governments to recover tax revenue lost to non-compliant taxpayers and will strengthen international efforts to increase transparency, cooperation, and accountability among financial institutions and tax administrations. Conceived in 2015, AEOI is just now becoming standard– with a variety of countries committing to implementing measures in 2017 and some in 2018. In total, 49 countries joined the AEOI exchange in 2017 and 53 in 2018. Four have committed by 2019 and 2020 and there are 43 countries which have not (yet) committed a date. To see a full list of which countries have committed and implemented AEOI standards, go to this list(courtesy of the OECD).The 43 developing countries which have not joined AEOI received an invitation too but are not required to meet a deadline. Instead, the OECD created an AEOI group from the Global Forum which works to ensure that developing countries can thus benefit from the AEOI and implement roadmaps to develop infrastructure necessary for the standard.
In all, as globalization increases, governments are more able to identify tax fraud. That is why it is especially important to speak to a financial advisor to ensure your accounts are up to date and that nothing ‘slips through the cracks’. Still want to learn more? Check out this video by the OECD on the ‘Crackdown of Tax Evasion’
Written by Chris Gitre
