Mexico and the Foreign Account Tax Compliance Act (FATCA)
Mexico and the United States have a consistent history of bilateral cooperation on tax issues. Mexico and the Foreign Account Tax Compliance Act as it relates to Mexican assets held by US citizens and legal immigrants is no exception.
The long reach of the IRS
The Foreign Account Tax Compliance Act, or FATCA, was enacted in 2010 and put into effect in 2014, as a provision of the Hiring Incentives to Restore Employment (HIRE) Act. The purpose for the implementation of this legislative measure was to create a means by which to identify US citizens in possession of non-US assets. Among some of the estimated 8.7 million US citizens worldwide holding non-US assets are:
- foreign investors
- dual citizens
- legal immigrants
As is the case with Mexico and the Foreign Tax Compliance Act, the law is used as a mechanism to detect assets, and requires Mexican and other foreign banking and other financial institutions to automatically report holdings of non-US assets by American citizens and legal immigrants. Information provided by foreign financial institutions is cross-checked against such persons’ self-reported data at the Financial Crimes Network (FINCEN). The goal of the FATCA, as may be surmised, is to increase tax collection on foreign assets held by US citizens and legal immigrants. Discrepancy in the reporting of such information by the affected parties results in the imposition of fines, and, potentially, large penalties. US citizens are required by law to report income from all sources, even though they may not be resident to the United States. In addition to the bilateral cooperation that exists as regards Mexico and the Foreign Tax Compliance Act, the former also cooperates with US tax officials most notably with regard to:
- the Convention on Mutual Assistance in Tax Matters, which was signed in Strasbourg, France in 1988;
- the Tax Information Exchange Agreement, which was agreed upon by both countries in Washington, D.C. in 1989
- the Agreement between the United States and Mexico for the Avoidance of Double Taxation and Fiscal Avoidance in 1992.
FACTA has to do with accuracy in reporting
While Mexico and the Foreign Tax Compliance Act creates an environment in which Mexican financial institutions report on non-US citizens an legal immigrants south of the border, the government of the United States has agreed to reciprocate by sharing similar information as regards Mexican citizens holding US assets.
The main provisions of the FATCA include:
- A requirement that non-US banks and other financial institutions, through an agreement with the Internal Revenue Service, to identify and create a database US of citizens for whom they hold accounts and manage assets.
- US citizens that are owners of accounts and assets held overseas are required to report such financial assets on IRS FORM 8938 Statement of Specified Foreign Financial Assets. It is law that assets valued over US $50,000.00 be disclosed.
The rules of the FATCA are not only applicable to accounts and other assets held by US citizens in non-US banks and financial institutions, but also are applied to the shared accounts and assets of a US citizen with family members and business partners. As is the case in all non-US settings, in the context of Mexico and the Foreign Tax Compliance Act, the FATCA includes a feature that allows and calls for the reporting of the assets of non-US corporations in which a US citizen has full ownership, or participates as an equity partner. This includes US citizens that participate in the ownership of Mexican manufacturing facilities.