If you have done some research on offshore bank accounts as an American, chances are you have come across a variety of confusing terms and abbreviations like FATCA, FBAR, AEOI, or CRS. This article aims to shed some light on the laws surrounding cross-border (meaning offshore) banking relationships. We explain what the current rules are and what you need to know when moving money offshore. However, before we start, please note that we are not tax professionals, this article is just for educational purposes. If you need specific tax advice for your personal situation, we kindly ask you to consult with your tax attorney.
Key Law and Reporting Requirements for Americans
The Foreign Account Tax Compliance Act (FATCA) is a U.S. law that took effect in 2010. Switzerland agreed to it in 2012 and it started to take effect there in 2014. It requires foreign financial institutions (like Swiss banks) to report U.S. connected people (e.g. passport holders and green card holders) to the U.S. Department of Treasury.
FATCA also requires U.S. connected people to report their offshore bank account(s) to the Internal Revenue Service (IRS) on form 8938. This requirement is in addition to the older requirement to report to the Financial Crimes Enforcement Network (FinCEN) on form 114. This latter requirement is also called Foreign Bank Account Reporting or FBAR.
Background of the Act
While FATCA was initially implemented to fight international tax evasion, it also applies to several million dual citizens and expats, making it hard for them to open bank accounts in their country of residence. The law also has implication for people who are not U.S. connected but have U.S. family members or business partners.
FATCA is used to locate U.S. persons and to collect and store information including total asset value and Social Security number. The law focuses on assets exceeding $50,000 and not on income. It also does not include a provision imposing a tax. In the law, financial institutions like offshore banks would report the information they are required to gather to the IRS.
U.S. connected people are required to self-report their assets (as mentioned above) and the information received by offshore financial institutions like banks are used to cross-check whether U.S. taxpayers have correctly self-reported their assets on an annual basis. If money have not been self-reported, this can lead to rather large penalties.
Automatic Exchange of Information and the Common Reporting Standard
The automatic exchange of information (AEOI) is an international standard aimed at creating transparency in terms of assets held outside the country of residence. The AEOI was created for tax matters and over 100 countries have agreed to adhere to this standard. Switzerland is one of those countries.
The standard was introduced by the Organization for Economic Co-operation and Development (OECD) in 2014. Under this standard governments in participating countries will pass information on to other countries concerning the earnings and assets held by taxpayers. The goal is again to prevent international tax evasion.
One information standard of the AEOI is the Common Reporting Standard (CRS). The idea of the CRS was based on FATCA. The first reporting started in 2017. Which information is exchanged between participating countries is detailed and discussed at length. In summary it consists of the name, address, taxpayer identification number (TIN) and date and place of birth of each reportable person. Additionally the account number, name and identifying number of the reporting financial institution; account balance at the end of the calendar year. And lastly, capital gains, depending on the type of the account.
What about Privacy?
Next to international diversification and an added layer of asset protection, privacy still ranks high for people looking to move money offshore. Is this benefit now all gone? No, not entirely. Secrecy in regards to tax evasion and towards the government is gone. However, there is still a lot to say about privacy. Your wealth, spending habits and almost every other detail of your financial life is under scrutiny in the U.S. The U.S. is one of the few nations where it is legal for banks and other financial services to disclose information about your accounts without your permission and without probable cause of wrongdoing. There are armies of information brokers, which advertise their ability to uncover assets, in search of lucrative victims of frivolous lawsuits. They will definitely not be able to pry any information out of an offshore bank account!
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