Costa Rica signs agreement to report holdings of U.S. citizens living here

Costa Rica becomes the second country in Latin America to sign an agreement to comply with the Foreign Account Tax Compliance Act, FATCA. 

U.S. Chargé d'Affairs Gonzalo Gallegos (left) and Costa Rican Finance Minister Edgar Ayales (right) signed a memo of understanding Tuesday, Nov. 26, on the Foreign Account Tax Compliance Act, FATCA, making Costa Rica the second country in Latin America after Mexico to sign such an agreement with the United States.

      

At Costa Rica’s Foreign Ministry, Costa Rica joined Mexico as the second country in Latin America to sign a memorandum of understanding to comply with the U.S. Foreign Account Tax Compliance Act (FATCA) on Tuesday afternoon.

Costa Rican Finance Minister Edgar Ayales and U.S. Chargé d’Affairs Gonzalo Gallegos signed the memo, ratifying the agreement that financial institutions would report the holdings of U.S. citizens living in Costa Rica, or face a 30 percent retention tax on payments from the United States.

Under the memorandum, Costa Rican financial institutions will report this information to the Finance Ministry, who will then submit it to the Internal Revenue Service.

Starting on March 31, 2015, local financial institutions will have to start reporting to the IRS information about their U.S. taxpayer clients who conducted transactions during 2013 and 2014. Starting in 2016, personal accounts containing more than $50,000 and corporate accounts containing more than $250,000 will be reported.

“This shows Costa Rica’s willingness to be transparent [and] collaborate in the fight against tax evasion, money laundering, and legal loopholes,” said Ayales, who added that sharing financial information would improve the country’s once notorious reputation as a tax haven and bring Costa Rica in line with international banking standards.

Gallegos added that the mechanism would benefit both countries.

"FATCA is not a mechanism to collect taxes directly,” Manrique Blen, a tax specialist with Deloitte in Costa Rica, told The Tico Times, “It's a mechanism to collect information, investigate and then decide if there needs to be additional collection."

Blen reminded U.S. expats living in Costa Rica that the U.S. tax system obliges them to report their holdings abroad, even if they don’t receive an income. The tax specialist added that besides personal accounts, FATCA requires financial institutions to list any U.S. shareholders with at least a 10 percent stake in a Costa Rican corporation.

In 2010 the United States passed the HIRE Act, which grants incentives to employers who contract persons who have been unemployed for a certain period of time. To cover the cost of these incentives, the government created FATCA, which institutes a series of controls over international financial operations.

Story by Zach Dyer for the Tico Times (26th November 2013). Read the full story in the Tico Times here

US delays FATCA implementation by a further 6 months

The IRS has delayed the start implementation date of the FATCA implementation by a further 6 months from January 1st 2014 to July 1st 2014.

Treasury Deputy Assistant Secretary for International Tax Affairs Robert B. Stack. is reported as saying the delay is due to overwhelming interest in FATCA - “Given the groundswell of international interest in FATCA, we are providing an additional six months to complete agreements with countries and jurisdictions across the globe, before withholding begins."

It is widely reported that the real reason for the delay is the low compliance rate with just 9 agreements in place worldwide and in excess of 80 still under discussion.

Enacted by Congress in 2010, FATCA targets non-compliance by U.S. taxpayers using foreign accounts. FATCA requires foreign institutions to tell the IRS about accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold substantial ownership. To avoid withholding, a participating institution must enter into an agreement with the IRS to: 

• Identify U.S. accounts; 
• Report certain information to the IRS regarding U.S. accounts; and 
• Withhold a 30% tax on certain payments to non-participating FFIs and account holders unwilling to provide the required information. 

Foreign institutions that don’t sign an agreement with the IRS face withholding on payments, including U.S. source interest and dividends, gross proceeds from the disposition of U.S. securities, and pass-through payments.

You can see the official notice here

Read more on forbes.com here

Hire Act (March 2010) may have dramatic consequences for US citizens investing abroad

The Hiring Incentives to Restore Employment (HIRE) Act was signed into law in the US in March 2010 and whilst most of the act relates to specific incentives to create and employment within the USA, there are specific parts (Foreign Account Tax Compliance or FACTA) that may have long reaching consequences for US citizens wishing to invest or own real estate abroad.

Enacted by Congress in 2010, FATCA targets non-compliance by U.S. taxpayers using foreign accounts. FATCA requires foreign institutions to tell the IRS about accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold substantial ownership. To avoid withholding, a participating institution must enter into an agreement with the IRS to: 

• Identify U.S. accounts; 
• Report certain information to the IRS regarding U.S. accounts; and 
• Withhold a 30% tax on certain payments to non-participating FFIs and account holders unwilling to provide the required information. 

Foreign institutions that don’t sign an agreement with the IRS face withholding on payments, including U.S. source interest and dividends, gross proceeds from the disposition of U.S. securities, and pass-through payments.

The regulations are sweeping and the penalties for non compliance by US banks are very punitive.

What is the likely end result of these regulations?

1. US banks will levy the tax on all foreign transfers because from their point of view it will be easier "to be safe than sorry"

2. Foreign banks will not want to open bank accounts for US citizens because of the new stringent  reporting requirements.

These regulations will be enacted into law on the 1st of July 2014 (IRS has now announced a delay on implementation until the 31st December 2013 and a subsequent delay to 1st of July 2014).

So if you plan to invest abroad, the likely end result after 1st of July 2014 is that the money you wish to use to purchase your dream Costa Rican home will be subject to an additional US tax or will be monitored closely.

Is there a solution? Well the answer is to act before the  1st of July 2014.(IRS has now announced a delay on implementation until the 1st of July 2014).

The law has not yet been enacted, if it does enact on the 1st (and no commentator is suggesting it will not) and you have taken action and placed your funds abroad, you're budget is intact. If the law does not enact and you decide not to invest abroad in real estate or other investment opportunities, you can bring your funds back into the US.

For those clients who have not yet decided on a home in Costa Rica and want to keep their investment options open, we have an excellent CD Eco Mortgage Investment offering 10.95% interest and a 1 year term. See more about it here.

This CD Eco Mortgage Investment can also be combined with a residency application and you can read more about that here

You can download the HIRE act here. Page 27 is the section referring to Foreign Account Tax Compliance. Alternately a google search on the Hire act and currency control will give lots of views on this new law.

Avoid this significant reduction in your investment budget and take action now, avail of our Eco Mortgage or contact us on our website or by e mail at info@costaricainvest.ie or by phone on

USA +1-866-990-1123 (toll free) or Europe +353-1-272-4184 and we can discuss solutions specific to your needs.