Topics Covered Hide
- 1 Understanding the concept of FATCA
- 2 The reasons behind FATCA
- 3 Having nothing in your name
- 4 Holding cash instead of using a bank account
- 5 Use a foreign branch of an American bank
- 6 Own property in your own name
- 7 Holding precious metals
- 8 Going to a non FATCA country
- 9 The cause and effect of FATCA
- 10 Long term effects of FATCA
- 11 Conclusion
Barack Obama signed FATCA in 2010. FATCA stands for the Foreign Account Tax Compliance Act and became a legal requirement targeting Americans from all over the world – exactly, including those who do not live or work in the USA too.
At that time, FATCA paved the way to multiple similar acts with the one and only purpose to boost transparency and communication in terms of offshore banking. This act is one of the elements that ruined privacy in this industry.
Now, unless you plan to commit a financial crime, FATCA should not really affect you. But on the other hand, it is disturbing to know that banks are actually asked to spy on their customers and mention specific aspects about them – it feels like going back to the 1970s in Eastern Europe.
With all these, you have to adapt. FATCA has changed everything in offshore banking, and the act has affected – both directly and indirectly – people from all over the world. Here is everything you need to know to protect yourself – as well as a few FATCA loopholes to help you get through.
Understanding the concept of FATCA
The Foreign Account Tax Compliance Act has a self-explanatory name. To keep it simple, its primary role is to ensure that everyone in the USA – including foreigners – and Americans living abroad will report their foreign bank accounts and holdings to the IRS.
Until FATCA, lots of Americans used to open bank accounts abroad or perhaps run different businesses abroad – whether they lived there or they tried to optimize taxation. Since the USA taxes Americans living and working abroad too, FATCA was a necessity to keep an eye on them.
Exactly – if you are American and work in Germany, you will be taxed in both Germany and the USA.
Even before FATCA, Americans still had to report their foreign bank accounts to the IRS or other similar organizations. Besides, the IRS could get in touch with banks should any problematic circumstances come up.
But then, foreign banks are not run by the American government. Besides, they are aware of the harsh double taxation tactics, so they are usually against the system. In other words, there was little to no enforcement from the IRS.
At this point, American politicians decided Americans would not declare everything – just like they do, as you can see in all the offshore scandals and leaks occurring every few years. Therefore, they came up with FATCA.
The American government became a central point in the global financial system and aimed to seek information on all American customers. Those who refused were heavily fined and almost banned from doing business in the USA.
The point was easy – no extra work required by the IRS, but more money for politicians.
Talking about FATCA loopholes, banking in a country with no relations to the USA and no subsidiaries or branches in the USA could still give you some privacy, especially if the respective jurisdiction has a reputation to be against the USA.
The reasons behind FATCA
FATCA was signed in 2010. Take a look at the time frame. While the 2008 financial crisis was over, the world was still in recession and trying to recover. Many countries were close to bankruptcy, and USA was one of them due to its massive debt.
Then, Barack Obama tried to revive the economy by getting money to move. He aimed to invest in infrastructure before anything else – just getting the money out circulating. However, his plans were quite pricey, so he needed something to get more money in and make his plans viable.
Evil Americans hiding their money in offshore accounts were immediately targeted then.
Now, while anyone can have an offshore account and hold money in there, the truth is that a few scandals have seriously ruined the reputation of this industry. Millionaires hiding their money abroad are often revealed in random leaks – even if they do it legally.
The press wants to put a bad mark on this industry. You might be familiar with important political names, sportspeople, or perhaps celebrities like Shakira and Elton John in such leaks. They are doing everything legally, but the press aims to put a black spot on them for keeping money abroad.
From all those leaks out there, only a few of them were proven to be right.
In other words, a few bad apples and the exaggeration in the press have ruined it. Offshore banking is not associated with high net worth individuals trying to avoid taxation. Some people still see offshore banking like that, yet there is nothing wrong with it.
All in all, Barack Obama decided to go after every American with an offshore bank account in order to get some money into the system. It was a solid win for him because apparently, he got all the bad boys stealing money – just an impression for the average American.
Now, what are some of the most popular FATCA loopholes out there, and what do they imply?
Having nothing in your name
If there is nothing in your name, chances are nothing can be taken away from you in case you make any mistakes. Sure, some judges may follow circumstances as well, rather than just what is written on papers. But unless you are Jeffrey Epstein, it is less likely to happen.
Now, you cannot just make some new friends abroad and put properties or bank accounts in their name. Instead, this option is more suitable to those who get married to foreigners. Obviously, you must trust your partner more than 100%.
People get divorced and break up after decades together, so there is always a small risk. However, assuming you decide to move abroad and start a new life there, chances are you will also get a job and start working.
You do not want to bother reporting to the American government and getting taxed twice, do you? As an American, double taxation is a harsh reality. But when it comes to FATCA, not having anything in your name is the way forward.
In an ideal case, the person you marry should come from a wealthy family with a good reputation. This is a bit of a guarantee against you losing everything – if they are loaded anyway, they may not be bothered with taking everything from you.
Of course, there are more people you could use to store stuff abroad – and perhaps trust even more. If your parents immigrated to the USA and they are not back in their main country, they could drop their nationality, and you could have everything in their name.
cash-instead-of-using-a-bank-account" data-toc="1" >Holding cash instead of using a bank account
There are some reasons wherefore lots of people choose to hold cash rather than bank accounts. Simply put, they do not trust banks or their own governments – it is quite common in many parts of the world these days.
Take a look at all the Ukrainians crossing borders to Slovakia, Hungary, Moldova, or Romania with millions of euros or American dollars hidden in luggage. Think about all the millionaires who make money illegally too.
When it comes to FATCA, the act clearly mentions that bank accounts are the only ones that need reporting. If you have a foreign bank account, you will need to report it. Otherwise, there is nothing to be concerned about.
So, if you make a few million and you decide to keep all the cash in a safe, you do not need to report it to the American government. Whether you hold money in your mattress or your wallet, these amounts must not be declared.
Now, things get even better – you can have a safe at home, but you could still be targeted by burglars if everyone knows you are loaded. The better option implies using a reputable bank's safe. You are not opening a bank account but just using a safe that is guarded on a 24/7 basis and insured.
Things are different for bank accounts – even if they are open in other currencies. You could, however, have a bank account and withdraw money as soon as they get in. At this point, your circumstances would come into play and could make the difference in a court case.
It is just wiser to avoid it.
Use a foreign branch of an American bank
This is one of the most popular FATCA loopholes out there, yet it does not necessarily provide any privacy. In fact, the secret behind this loophole is the fact that you no longer need to file certain forms, as the American government may already be aware of what you own.
The idea implies using a foreign branch of an American bank. For example, take Citibank. You have always used Citibank while in the USA. Whether you run a business, work, or live in Mexico, chances are you now use the local Citibank branches.
Just because the branch is located outside the USA, it does not mean that it is foreign. The institution is still American. You do not have a foreign bank account, but an American bank account running abroad. The act does not cover the location, but the actual institution.
While you do not have to report this bank account, holding millions in there is less likely to give you privacy. After all, you are still fully exposed to the American government – it is, indeed, a loophole, but not the most advantageous one.
Own property in your own name
This is one of the best FATCA loopholes out there, but it requires a good lawyer to enforce it. While you do expose yourself to the American government, you are also able to get some money from the people who chased you away. How come?
From the American taxman's point of view, this is the simplest and most effective option to own a property abroad. It makes no difference if you purchase some land, holiday home, or perhaps a building for an office.
If you are American, this type of real estate is treated just like real estate in the USA. What does that mean? There are no differences in terms of taxing. You will, indeed, pay tax, but this could work in your favor if you play your cards right.
If you got this property with a mortgaged loan, here is some good news for you:
- Property taxes are deductible in the USA, and the same rule will apply to your property in another country.
- Mortgage interest is deductible, so get money from the American government to help with your loan in a different country.
On another note, claiming money from the American government and taking advantage of this loophole will also come with some drawbacks. If you make any earnings on that type of real estate, it must be reported to the American government – such as renting it out.
Holding precious metals
Holding precious metals is like holding cash. You could own 100 pounds of gold in another country. If they are held in a storage facility, they do not need to be reported. You could own gold in your personal safe or in a hidden room in the basement – such things must not be reported.
However, gold in large amounts will require some security, not to mention insurance.
On the other hand, just like bags of cash, you can also hold gold bars or whatever precious metals you have in different storage facilities – banks or perhaps specialized services. But then, here comes the most important question – is there an account number associated with the name?
Even if it does not look like a classic bank account, it is similar. If a particular institution – such as a gold – asks you to open an account and gives you a number, this account should be reported to the American government.
But then, if you only pay monthly for specific storage in vaults or safes, there is no need to report it.
The same rule applies to other similar things that can hold a lot of value and would normally be reported. From antiques and expensive jewelry to cars and art, collectible items must be reported if they are held with an account – never if you keep them yourself.
Going to a non FATCA country
Now, FATCA is an American thing. In theory, you could avoid it by opening bank accounts in countries that are not friends of the USA. Such countries are less likely to provide information to the IRS on request anyway.
However, some of these countries may have banks in the USA. If they have branches of subsidiaries, they may get fined if they refuse to share your information, so they may actually do it. Therefore, you need to take this aspect into consideration as well.
Furthermore, some countries may not be FATCA compliant, but they do report to the IRS on request.
Some non FATCA compliant countries include:
- North Macedonia
Obviously, this list is longer than that. Some of these countries are in good relationship with the USA and may report you, even if they are classed as tax havens. Some others are not, but they are also not safe for your money – would you open an offshore account in Syria? Exactly…
The cause and effect of FATCA
The official statement of FATCA when it kicked in was the possibility to catch bad guys and millionaires who hide money abroad. The average American appreciated the idea – after all, why would they pay tax when others do not? However, they missed the whole purpose of FATCA due to the lack of education.
Financial education shows us that some of the consequences of FATCA were completely different from the intended goals. At the end of the day, these consequences may have been the actual goals hidden under a nicely colored umbrella.
The official justification of FATCA was going after high net worth individuals hiding wealth abroad. How much? According to the government’s estimates, the USA would get almost $800M a year in extra tax money.
The reality is different because the government did not get all that money. It did not generate so much money – in fact, it actually required hundreds of millions to be fully implemented. Sure, it caught a few bad financial experts off guard, but the revenue was far from the estimates.
The incoming money from a few petty criminals was not enough for Barack Obama to start and complete his original investment plan anyway, so most financial experts believe it was just a play in from the financially uneducated.
To keep it simple, FATCA is a type of capital control in the USA. Sure, as an American, you can still go abroad and open an offshore bank account. FATCA has made it more difficult because many banks will refuse you – as they do not feel like spending money to implement the act.
As a direct consequence, there are fewer Americans taking their money in a different jurisdiction. There are more reasons wherefore this trend has been observed. For instance, some Americans believe that opening an offshore account is no longer possible – wrong, you can still do it.
On another note, many Americans – or even tax residents of other nationalities – find banking with FATCA too problematic. The hassle may not be worth for $100,000. Sure, if there are millions to talk about, things could be different.
Officially, the world will never know the official purpose of FATCA. Maybe the government actually believed in making enough money to change the country from scratch, but no one with some financial education is that blind.
Long term effects of FATCA
FATCA does have a lot of fans – especially throughout the government. It is not perfectly scripted, so there are still plenty of FATCA loopholes out there. But then, there are also officials who believe that it does more harm than good, so it may not necessarily be the best idea.
FATCA is not the only law or act of this kind, as other countries or unions have similar laws. In theory, they are made to catch criminals. In reality, they will only catch the inexperienced criminals and will not make enough money to justify the implementation.
Instead, FATCA is more likely to affect innocent people who diversify their assets or live abroad.
No matter what the American government comes up with, the truth is a criminal is ready for anything. There will always be new ideas to work around the laws. It is the average individual who gets affected, rather than the criminal.
There have been more calls to repeal FATCA over the past years, but the truth is politicians will milk it for as long as possible – they will try their best to catch criminals stealing from the average American and hiding wealth abroad. And the problem is that the average American actually believes this gibberish.
At the moment, FATCA is still around. It makes no difference if you are a resident or an American citizen. If you are subject to American taxes for one reason or another, you will need to deal with this problematic act.
For now, the only option implies renouncing American citizenship – another common trend these days.
Bottom line, there are, indeed, a bunch of FATCA loopholes that could make your life easier. But then, no matter what you are trying to do, it pays off planning everything in small details and actually working with a lawyer.
No one knows how long the act will be around – while there are some loopholes, it can still make people’s lives more difficult for no reason at all.