The Foreign Account Tax Compliance Act (FATCA), which comes into effect on July 1 2014, is a new provision intended to combat tax evasion by U.S. citizens using offshore accounts. While advocates have claimed that FATCA could wrest back $100 billion in tax revenue, critics have argued that it is a violation of sovereignty, costs millions of dollars for banks to comply, and raises privacy concerns.

What does FATCA mean for Foreign Financial Institutions?
Under FATCA, foreign financial institutions (FFIs) must report FFI’s US accounts to US tax authorities such as the Internal Revenue Service (IRS). These FFIs become known as “participating FFI.” An FFI that is not FATCA compliant however, will be subject to a steep withholding tax of 30% on US-sourced payments such as dividends and interest paid by US corporations.

What does FATCA mean for US persons?
Although US taxpayers with less than $50,000 in assets may be exempt from FATCA, those with foreign financial assets exceeding a value of $50,000 must file Form 8938 and attach it to the annual tax return. Failure to do so will result in a penalty of $10,000 and continued failure after IRS notification will result with a penalty of up to $50,000.

There are numerous unintended adverse effects on US persons as a result of FATCA. For example, US citizens have been rejected businesses from FFIs who find FATCA too complex and costly. US citizens who live outside the US need foreign bank accounts for legitimate reasons but are now becoming financial pariahs. For these reasons, many US persons are considering relinquishing US citizenship. According to official numbers, there were 1,131 American expatriates relinquishing their U.S. citizenship in the second quarter of 2013, compared with just 189 in the same period the previous year. This is a remarkably high figure, portraying not only the rise is awareness of FATCA’s effects, but just how much FATCA is becoming recognized across the world.