The IRS has launched a global data exchange service, supporting reporting under FATCA.

The IRS has opened a global data exchange service through which financial institutions and countries will send information reports on their accounts held by US persons to comply with the Foreign Account Tax Compliance Act.

IRS Commissioner John Koskinen described the move as a “milestone” in the implementation of FATCA, which was enacted in 2010 and came into force last July. The aim of the law is to curtail offshore tax evasion by requiring individuals to report their financial accounts held outside of the US and foreign financial institutions to report to the IRS about their US clients. Those who are not compliant will suffer a 30 per cent withholding tax on income and gross proceeds. Many wealthy managers impacted by the the act have had to undertake thorough reviews of their processes and procedures in order to accommodate the requirements. Institutions including HSBC and Deutsche Bank have even stopped offering financial services to expat US persons.

The IRS said over 145,000 financial institutions have registered through the IRS' FATCA registration system, while the US has established around 110 inter-governmental agreements - either signed or agreed in substance - to implement the controversial law.

With the International Data Exchange Service, which is an encrypted web-based application, “comes the start of a secure system of automated, standardized information exchanges among government tax authorities,” said Koskinen.

2015 presents three key FATCA dates that firms need to be aware of: March 31 is the first FATCA reporting deadline for foreign financial institutions in non-IGA jurisdictions and those in Model 2 IGA jurisdictions, meaning firms will need to report the US account information to the IRS or relevant tax authorities. May 31 or June 30 are typically the dates of the first FATCA reporting for those in Model 1 IGA jurisdictions and June 30 is when the review of pre-existing high-value individual accounts (over $1 million) must be completed (source: Kinetic Partners).

Host country tax authorities in Model 2 IGA jurisdictions and financial institutions are encouraged to begin the enrollment process before their reporting deadline, the IRS said. To begin transmitting information via the IDES, a financial institution or tax authority will need to obtain a digital certificate, which binds digital information to physical identities.

Meanwhile, for host country tax authorities in Model 1 IGA jurisdictions, the IRS will directly notify them as regards when to enroll. Financial institutions will initiate enrollment online on their own, although they must register as a participating financial institution and have a global intermediary identification number. 

FATCA controversy

FATCA has come under heavy criticism due to the heavy financial burden it places on foreign financial institutions, with significant requirements for registration, due diligence and reporting. This has forced many entities to change or adopt their operating models, invest in technology and spend more in order to meet compliance costs. Consequently, some foreign financial institutions have decided to stop serving US citizens, while another concern flagged up relates to the divestment of US assets, resulting in capital flight.

Additionally, it has been suggested that the US crackdown has prompted many Americans living abroad to give up their citizenship. According to Treasury Department figures published in the Federal Register last year, 3,000 US citizens have handed in their passports – three times the average of the past five years.