The US government is considering proposals that would address some of the criticisms of the Foreign Account Tax Compliance Act, according to media reports, raising speculation that some of the harsher aspects of this controversial legislation may be softened.

FATCA requires foreign (non-US) financial institutions to identify their US account holders and annually report them to the Internal Revenue Service, along with details of the accounts held and any transactions made during the year. An FFI that does not agree to comply must pay a 30 per cent tax on all US "withholdable payments" it receives, including income, gross proceeds of sale and pass-through payments from other FFIs.

Changes to the Act are being considered to deal with issues over privacy laws, and concerns that require overseas institutions to report details of US clients directly to the IRS contravenes such laws, according to the Financial Times.

Regulatory changes tackling the administrative burden that FATCA imposes on banks are also expected this week.

“We believe that these proposals will substantially address the many comments we have already received regarding administrative burden, and will do so in a manner consistent with ensuring that the underlying objectives of FATCA are met,” Emily McMahon, acting assistant secretary for tax policy at the US Treasury, is quoted as saying.

Specifically, the latest regulations are likely to hone the rules in on larger accounts, and to amend the procedures required to identify US clients, making them more similar to those that financial institutions already follow under anti-money laundering rules.

Last July the IRS moved to delay the date when foreign financial institutions (FFIs) had to enter an agreement with it until June 2013, providing for effective reporting on US clients in 2014 – a year later than the industry had previously expected.

Warnings

Since the Act was approved in March 2010, financial institutions and technology firms have warned that it will deter some firms from serving US expats at all, reducing the amount of choice expats have in obtaining financial services. The measure could even discourage firms from sending US citizens abroad. The legislation reflects how the US, unlike many other countries, taxes citizens on a worldwide, rather than territorial, basis. 

Just this week, the London-based private bank C Hoare & Co became the latest FFI to close down services to its US clients when it withdrew portfolio management from its offering, citing stricter regulation.

The private bank will continue to offer services other than investment management to its clients in the US, but the bank’s chief executive, Alexander Hoare, suggested that these might also come to an end “if they (the US regulators) continue to go down that path.”

Hoare, a member of the original family, told Family Wealth Report that the firm's US client base is “negligible.” “It is not a problem for the bank, it is a problem for the customers,” he said. (Family Wealth Report is a sister publication to WealthBriefing).