For American expats:
- US taxpayers holding foreign financial assets with an aggregate value exceeding US$50,000 must report information about these assets on Form 8938 on their annual return. Reporting applies for taxable years beginning after March 18, 2010. Failure to report results in a penalty of $10,000, running up to $50,000 for continued failure after notification by the US Internal Revenue Service (IRS).
- The foreign earned income exclusion remains set at $95,100 for 2012.
For foreign financial institutions, which could be companies, financial advisers and even pension funds that have American clients:
- Foreign financial institutions must sign an agreement with the IRS requiring them to (1) undertake identification and due diligence procedures for account holders; (2) report annually to the IRS about US account holders or foreign entities with substantial US ownership; and (3) withhold and remit to the IRS 30% of payments from US-source income as well as gross proceeds from the sale of securities that generate US-source income made to (a) non-participating institutions, (b) individual account holders who fail to provide sufficient information to determine whether they are US citizens, or (c) foreign entity account holders that fail to provide sufficient information about the identity of its substantial US owners.
- The law will be phased in, with foreign financial institutions expected to sign the agreement with the IRS by Dec 31, 2013. Withholding on gross proceeds begins from Jan 1, 2015 and withholding on foreign passthru payments on Jan 1, 2017.
- The IRS reserves the right to define what a passthru payment is, but for now it describes it as any withholdable payment or a payment attributable to a withholdable payment. These could be payments from a US source, or a clearing organisation that goes through a US source, or from a foreign source to a US account holder.
- Withholding does not apply when the beneficial owners are: foreign governments, international organisations, foreign central banks, governments of US possessions, certain retirement funds or entities wholly owned by exempt beneficial owners.
Sources: US Internal Revenue Service; Morrison & Foerster LLP