In the US, the Foreign Account Tax Compliance Act (the “FATCA”) was enacted in an effort to crackdown on offshore tax evasion by US taxpayers and to collect overseas financial information. Under the FATCA, foreign financial institutions are required to report to the US Internal Revenue Service (the “IRS”) information related to accounts held by US taxpayers. With the imminent enforcement of reporting, due diligence and withholding obligations imposed on the foreign financial institutions under the FACTA, it is expected to have following ramifications in Korea.
- Overview of the FATCA
The FATCA came into effect as of March 18, 2010 as the President Obama signed the bill, designed to prevent offshore tax evasion by US tax payers and collect financial information abroad. The main thrust of the FATCA is to impose on foreign financial institutions having as clients US corporations or US citizens the obligation to report to the IRS financial information about their US clients. The reporting, due diligence and withholding obligation of foreign financial institutions under the FATCA will come into effect from July 1, 2014.
- Reporting Obligation and Penalty for Violation
Any US taxpayer holding foreign financial assets with an aggregate value exceeding USD 50,000 is required to report such financial assets held overseas when he files his US tax return. A taxpayer in violation of such reporting obligation will be subject to fine in the amount of USD 10,000 (up to USD 50,000 for continuing violation after the IRS notification). Further, a 40% understatement penalty will be assessed for underpayments of tax attributable to non-disclosed foreign financial assets.
In addition, the FATCA requires foreign financial institutions to enter into an agreement with the IRS to provide information about financial accounts held by US taxpayers or foreign entities in which US taxpayers hold a substantial ownership interest. The FATCA requires a withholding agent which makes any withholdable payment to non-participating or non-compliant foreign financial institution to deduct and withhold from such payment a tax equal to 30% of the amount thereof.
- The US-Korea Automatic Tax Information Exchange Agreement
Recently, the US and the Korean governments finalized the US-Korea Automatic Tax Information Exchange Agreement (the “Tax Information Agreement”) under which each government shall exchange tax related financial information on a regular basis every year starting from 2015. The Korean government plans to expedite the process to give effect to this Tax Information Agreement by officially executing the Tax Information Agreement and obtaining the National Assembly’s consent to the ratification of the Tax Information Agreement in the near future. The Tax Information Agreement would facilitate further the Korean tax authorities’ tracking and detection of offshore tax evasion of Korean citizens and Korean entities, because under the Tax Information Agreement, US financial institutions are required to provide the IRS with information about the US source financial income earned by Korean citizens and Korean entities.
- The FATCA’s Impact on US Taxpayers Previously US taxpayers including US citizens or green card holders have been required to provide certain information about their accounts held abroad under the Foreign Bank Account Reporting system. With the enactment of the FATCA, US citizens or green card holders became subject to additional reporting obligations. Once the reporting obligations of foreign financial institutions come into effect, it will become much easier for the IRS to detect and impose penalty on non-compliant taxpayers using such information obtained from foreign financial institutions. Therefore, US citizens and green card holders residing in Korea need to be aware of the reporting obligation under the FATCA and make efforts to comply therewith.