In 2010, the U.S. Congress passed the Foreign Account Tax Compliance Act
(FATCA). In an effort to ensure that U.S. residents do not hide funds subject
to taxation in foreign bank accounts, FATCA requires foreign banks to compile
and report information about U.S. residents deposit balances to the
U.S. government. Failure to do so to the U.S. governments satisfaction can
result in a 30 percent withholding of dividends, interest, or proceeds of
asset sales that a foreign banks customers receive from U.S. sources.
Such penalties would include all interest and fees accruing to the foreign
banks, thereby rendering accounts subject to such penalties highly unprofitable
to those banks. Even compiling and reporting the information to the
U.S. governments satisfaction pushes up foreign banks costs, which can
significantly reduce the profitability of U.S. depositors accounts.
A growing number of foreign banks have responded to U.S. enforcement
of FATCA by refusing to allow U.S. residents to open new deposit accounts.
Indeed, many foreign banks have even been closing U.S. depositors existing
accounts and returning the depositors funds rather than incurring the
costs of complying with FATCA.
For criticaL Thinking
How have foreign banks decisions to accept fewer deposits from U.S.
residents affected their total liabilities, other things being
unchanged?