Minister Tuitt: St. Maarten will bear the brunt of American legislation
THURSDAY, 26 JULY 2012
PHILIPSBURG--Minister of Finance Roland Tuitt said on Wednesday that St. Maarten will also bear the brunt of the Foreign Account Tax Compliance Act (FATCA) of the United States. As per January 1, 2013, FATCA will impose a new, 30-per-cent US withholding tax on any US-source "withholdable payment" made on or after January 1, 2013 to a foreign financial institution (FFI).
The new, 30-per-cent withholding tax applies unless the FFI agrees, pursuant to an agreement entered into with the US Internal Revenue Service (IRS) of the US Treasury to provide information with respect to each "financial account" held by "specified US persons" and "US-owned foreign entities."
According to laws of the United States, US taxpayers are liable for tax on their worldwide income. In order to combat tax evasion by US persons holding investments in offshore accounts, FATCA was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act, by the IRS. FATCA is an important development in US efforts to improve tax compliance involving foreign financial assets and offshore accounts.
Minister Tuitt explained that under FATCA, US taxpayers with specified foreign financial assets that exceed US $50,000 in value must report them to the IRS. Failure to do so will result in fines and penalties ranging from US $10,000 to $50,000, on discovering the infraction. Further underpayment of taxes resulting from undisclosed financial assets will result in a penalty of 40 per cent of these assets. In addition, FATCA will require FFIs (banks, insurance companies, trust companies, etc.) to report directly to the IRS information about financial accounts held by US taxpayers or by foreign entities (FEs) in which US taxpayers hold a substantial ownership interest.
The Minister said that FATCA would have a major impact on US taxpayers living in St. Maarten and on business in St. Maarten. "Measures has been taken by some European institutions to combat the effects of the FATCA, however, St. Maarten cannot do much against this, because it is a small island entirely dependent on the US economy. Some FFIs worldwide are already turning away US citizens and closing their existing accounts; their business is not worth the hassle anymore," the Minister said.
He further explained that FATCA exposes St. Maarten residents who are US citizens or green-card holders and FEs in St. Maarten to the possibility of increased IRS-reporting obligations and severe penalties for non-compliance.
"There are fears of imposition of capital controls, and as a result capital flight can very well be underway. After all, FFIs may consider leaving St. Maarten in order to settle in a non-compliant country. There have also been privacy concerns, in particular for those with dual citizenship. In an era of common dual citizenship, it is impossible for an FFI to definitely know whether any of its clients is also a US taxpayer (i.e. citizen, green-card holder, etc.)," the Minister said.
He said while the IRS uses a broad definition of financial institution, it is clear that beside banks, insurance companies, pension funds and investment funds are covered under FATCA. In other words, most of the financial sector in St. Maarten falls under the scope of the FATCA legislation.
"Although the measure at first sight is based on good intentions and the only focus seems to be on American citizens, it goes much further. All financial institutions and investment companies that have investments and income in the United States are affected by this measure. Beside the banks, all insurance companies, pension funds, asset managers, private equity funds and other collective-investment institutions will be affected. In order to comply with the rules on January 1, 2013, these financial institutions must have measures in place to shape their existing systems and business processes in a way that they facilitate compliance with FATCA. These adjustments require a lot of time and money," he said.
"In the formulation of a response to it, the Government of St. Maarten will carefully examine the options that are available with a view to settling on a solution that will serve in the best interest of the business and people in St. Maarten," the Minister concluded.