The U.S. Treasury Department program called FATCA could affect the ability of American expats in Mexico to open or maintain a local bank account in their local communities.
The Foreign Account Tax Compliance Act (FATCA) was passed in 2010 and implemented in 2013. Primarily designed to require more disclosure by non-U.S. banks to the U.S. Internal Revenue Service (IRS) regarding accounts owned by Americans, FATCA’s main goal is to track down Americans who try to dodge U.S. taxes by setting up secret offshore accounts.
FATCA requires non-U.S. banks, investment funds and other financial institutions to report to the IRS on accounts held by Americans with more than US$50,000. For American expat taxpayers living in Mexico and other countries, FATCA requires a report on accounts with more than US$200,000. Financial institutions in Mexico that do not comply with FATCA reporting rules could have a 30 percent tax imposed on all their U.S.-based transactions and also those of their U.S. clients.
To understand the impact of FATCA on American expats in Mexico, we spoke with Marylouise Serrato, the executive director of American Citizens Abroad (ACA), a non-profit volunteer association headquartered in Washington, D.C. that represents the interests of Americans living overseas.
“What we are seeing right now is hesitation by many foreign banks to keep American clients,” Serrato said. “It is a worldwide problem for Americans living abroad. It can be difficult for many American expats to maintain overseas banking services. In some cases, it also is affecting obtaining mortgages and lines of credit, although these do not have to be reported. ACA believes that foreign financial institutions are nervous because of the steep non-compliance penalties and the cost of implementing FATCA.”
Serrato said ACA also has received reports that foreign financial institutions that are not locking out American clients are having them fill out compliancy documentation and legal disclaimers in order to maintain their banking relationships.
“American expats who are being allowed to keep their bank accounts and financial relationships are being asked to provide compliancy documents such as a W-9,” Serrato said. “In some cases, foreign financial institutions are asking American expats to sign disclaimers to allow the institutions to exchange expat banking data with the US government or authorities. This obviously has some Americans concerned about fraud and identify theft.”
Financial institutions in Mexico and other countries have had their fair share of difficulties with FATCA since the requirement to report on U.S. accounts was implemented. Those that are fully compliant with FATCA, like the Hong Kong and Shanghai Banking Corporation (HSBC), are required by the law to collect personal and financial information from their American expat clients and report it to the local tax authority or the IRS on an annual basis. The type of information they collect and report to the IRS depends on each client’s FATCA classification number and can vary between each foreign financial institution.
Adding to the problem, the IRS also has stepped up its enforcement of The Report of Foreign Bank and Financial Accounts (FBAR), which has been on the books since the 1970s, but only recently vigorously enforced. Smaller account holders must complete an FBAR form each year if they own or have signature authority on a foreign account that exceeds a cumulative total of $10,000 at any time during the calendar year.
“The threshold for reporting is US$10,000 cumulative, which means that accounts with smaller values need to be reported to FBAR if, combined, they exceed $10,000,” said Serrato. “FBAR also takes into consideration not just bank accounts, but may require reporting of other investments. Many Americans living abroad who have foreign pension plans should be reporting those on an FBAR form, primarily because they may not be recognized as a qualified pension under U.S. law and therefore are considered a bank or investment account.”
Penalties for undeclared accounts are US$10,000 per account and can increase if the oversight is deemed willful.
While most American expats in Mexico will be affected by FBAR reporting requirements, FATCA reporting requirements are much higher and should affect fewer American expats.
“People will have to look at what investments they have to determine if it is reportable under FATCA,” Serrato said. “It is not just investment accounts; other investment vehicles also need to be declared on FATCA form 8938. We have a guidance tool on our ACA website that shows a comparative chart to help determine filing requirements for the FBAR form or an 8938 FATCA form.”
The U.S. government is hard at work negotiating bilateral FATCA agreements with the governments of some 50 countries. The bilateral agreements will allow the countries to intercede between their domestic banks and the IRS. According to the IRS, these agreements seek to combat tax evasion while minimizing the reporting burdens on foreign banks.
ACA’s Washington D.C. office also is working to help mitigate the problems so American expats can remain in Mexico and other countries and still have banking access.
“We are continuing to provide information to the Treasury and the IRS with the hope it will be used as guidance for drafting regulations,” Serrato said.
ACA is advocating for the adoption of “same country exception,” which would exempt American expats living in Mexico and other countries from reporting their local in-country financial accounts.
In order to assist American expats through the complexities of tax reporting, ACA offers a Tax Preparer Directory that is available free of charge on their website. The directory includes about 1,500 tax return preparers located in over 50 different countries.
Stateside banking alternatives for American expats in Mexico also may be limited. “Because of the U.S. Patriot Act, many U.S. banks are not allowing expats to establish or keep accounts if they cannot provide a valid U.S. residential address,” Serrato said. Banks in the United States require that you are a legal U.S. resident, have a physical U.S. address, a U.S. Social Security number and be at least 18 years of age. Expats, though, can meet the physical address requirement by using the address of a relative or friend.
If you have had a problem with establishing an account with a bank in Mexico, let us know.