How FATCA has Affected Offshore Investment

Even though the FATCA legislation didn’t truly begin until January 1, 2013 (at least on paper), after only three months it has already had a widespread ripple effect across international banking and offshore investment. Anticipating the additional costs of complying with the extraterritorial United States legislation, many foreign banking and investment entities had already taken steps to protect themselves from the expensive organizational implementation necessary to meet the requirements demanded of them.

The currently enacted FATCA (Foreign Account Tax Compliance Act) extends the extraterritorial jurisdiction of the United States further than ever before, extending the withholding tax rules beyond foreign-held U.S. securities into other forms of income and gross sales proceeds. The trend among offshore banking is to deny services to new clients who are United States citizens and to turn away American’s seeking legitimate means of diversifying and protecting their assets – because the effort of reporting American clients is too cost prohibitive. Banking and finance are an industry interested in making a profit, in case you have forgotten. And while it doesn’t mean the end to offshore investment for Americans, it does make it much more difficult to protect your assets and maintain privacy in regards to your finances.

The market for offshore investment and banking is still too big to ignore, however, and some FFI’s are looking for ways to circumvent and squeak around the FATCA rules. Unfortunately, while attempting to protect themselves they’re passing the costs on to investors and account holders in the form of higher investment minimums, denial of account privileges, higher management and organizational processing fees, and a seeming end to client privacy and confidentiality. In an effort to get what they want (chiefly, your money), the IRS and Uncle Sam are forcing FFI’s to sign international tax agreements or face stiff penalties. These international agreements require FFI’s to share private account holder information with the IRS in exchange for reciprocal account information (for taxation purposes) on foreign investors in the United States. Switzerland, France, Japan, Germany, Spain, Italy and the United Kingdom have all agreed.

There was an initial response to the FATCA legislation in the purchasing of gold and other valuable precious metals as a way to protect assets internationally. However, with clarification from the IRS in June of 2012, it was made plain that the sale of precious metals offshore is held as a taxable gain. Clarification also directly states that precious metals are not specifically considered foreign financial assets – but gold certificates issued by a foreign entity are considered a specified version of a foreign financial asset and are reportable. So now your gold and precious metals investments are also taxable if they are bought, sold or issued through a foreign entity.

It is beginning to get even more difficult for investors to find a way to protect their rightfully earned assets from being unduly or excessively taxed. The FATCA legislation is creating a shrinking environment in which American investors find themselves left in the cold and scrambling to meet tax deadlines and compliance even as ill-defined rules and regulations are late getting out of the starting gate.