Americans in Canada have six months’ reprieve.
FATCA, the Foreign Account Tax Compliance Act, comes into effect January 1, 2014. But with less than six months to go, the FATCA registration website is still not open.
Read: Ask clients about cross-border activities
To give countries more time to comply, the IRS will not require withholding until July 1, 2014. As well, new account opening procedures and related requirements will also begin July 1. (Read the full bulletin here.)
The act imposes a 30% withholding tax on certain payments made to foreign financial institutions and non-financial foreign entities that refuse to identify U.S. account holders and investors. To avoid the withholding, firms must document and share information about their U.S. account holders, an expensive and time-consuming process.
Read: FATCA adds to KYC burden for advisors
Kevyn Nightingale, partner with MNP in Toronto and the firm’s expatriate tax leader, isn’t surprised by the IRS’s move. “This is one in a series of extensions,” he says. “Administering FATCA the way it was written is a nightmare.”
Many countries are still in the process of negotiating their FATCA agreements, like Canada. Part of the holdup, says Nightingale, is “they intend to make the agreements reciprocal. That way, CRA can find out about Canadians with money in the U.S. and enhance CRA’s revenue generation capacity. Getting that process in place takes time. I don’t think IRS realized how popular the FATCA agreement approach would be.”
That’s because it’s much more effective to have local revenue generation authorities gather financial information, rather than each institution.
“All of these things point to it being more complex than originally contemplated, and taking more time isn’t a bad thing.”
Read: Offshore tax evasion in Treasury, IRS crosshairs
The IRS FATCA registration site is projected to open August 19, 2013. The IRS had previously indicated the site would open July 15.
Nightingale anticipates the opening date will be pushed even further into the future. “Anybody who’s tried to make a database for more than 1 million of anything knows it’s difficult to do well,” he says. Add to that many countries and people who don’t want to comply, and “there’s no way they will get a complete database.”
Read: OECD targets tax evasion
Despite these delays, don’t wait six more months to get ready for FATCA.
“You still have to be working toward compliance as fast as you can,” he says. “There will be a point when they say, ‘It’s due now.’ ”
Read: Tax cheats beware
And since Canada’s easy for the IRS to reach, “it wouldn’t surprise me if Americans who live in Canada are the first victims. Some of those people are going to be made examples of. It will take until 2016 or 2017 for real penalties to show up, but it will happen. The important thing is what you do now will matter then.”