FATCA, the Foreign Account Tax Compliance Act, is a US law aimed at curbing tax evasion by US citizens for tax purposes by requiring foreign financial institutions report on accounts in their institutions possibly held by US persons. The law, which went in to effect in 2010, was the result of the UBS scandal of 2009, when the Swiss bank was fined $780 million for actively assisting thousands of wealthy Americans evade taxes.
FATCA compliance has unilaterally created a whole new due diligence and reporting obligation for financial institutions and other entities. If financial institutions fail to report information and conduct due diligence, there is a potential 30% withholding tax on U.S. sourced income, profits, and gains.
Under FATCA regulations, foreign financial institutions (FFIs) are required to search their account records for accounts with indicators that they are held by US persons for tax purposes. The information concerning an account with such connection is forwarded to the US Treasury Department, including who holds the account and the account balance. The IRS then cross references the information with the US person’s tax return, specifically against informational return 8938, which is a declaration of assets held in foreign countries. Failure to disclose such assets can result in significant penalties.
FATCA compliance was seen by many governments as a unilateral impingement on the sovereignty of their governments and financial institutions. Switzerland, with a tradition of banking secrecy, was no exception. They opted to supply the account information according to the Model 2 reporting standard, which means the Swiss financial institutions reported the information to the US authorities without the involvement of the Swiss government. The Swiss FFIs required the consent of their clients to forward the information; without that consent, the information was supplied to the IRS in an aggregate report with certain account information included. The US can then request specific disclosure of client and account information under the administrative assistance provisions of the US-Swiss double tax treaty.
Switzerland also objected to expensive implementation costs associated with FATCA regulations. Switzerland passed a Swiss FATCA law in 2014 aimed at reducing implementation costs for Swiss financial institutions.