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Foreign account 'lockouts': another FATCA compliance consequence

To American ears, the term "lockout" seems to imply a labor dispute. It was only a couple of years ago, for example, that the players from the Lakers, the Clippers and other NBA were locked out of their practice facilities by the league. The lockout occurred when negotiations for a new collective bargaining agreement faltered. 

But lockout now has another meaning, not in labor law but in tax law. Under the sweeping demands of the Foreign Account Tax Compliance Act (FATCA), a lockout can now refer to U.S. taxpayers forced to close foreign accounts or unable to open them because foreign financial institutions (FFI) are no longer willing to do business with Americans.

In this post, we'll look at this lockout phenomenon: how the pressure of complying with FATCA has made FFIs reluctant or even unwilling to do business with customers from the U.S.

FATCA contains broad requirements for foreign businesses to report assets held by Americans or face severe penalties for failing to comply. In practice, this generally means FFIs must enter into compliance agreements with the U.S. Treasury to disclose data about customers who are U.S. taxpayers. If they do not, they face a 30 percent withholding tax on their income in the U.S.

Neither of those choices is at all attractive. Disclosing data about clients to tax authorities is obviously not something a business wants to do. But neither do foreign banks want to pay stiff withholding taxes. And even if this were not such a difficult choice, the administrative costs of offshore account compliance imposed by FATCA are considerable.

As a result, more and more foreign banks are making business decisions to not accept U.S. taxpayers as customers. Such lockouts, like the passport renunciations we discussed in our September 6 post, show the far-reaching effects of FATCA. 


Source: CNN Money, "Banks lock out Americans over new tax law," Sophia Yan, September 15, 2013

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