Costa Rica has joined Mexico as the second country in Latin America to sign a memorandum of understanding to comply with the United States Foreign Account Tax Compliance Act (FATCA)
The memo was signed at Costa Rica’s Foreign Ministry by Finance Minister, Edgar Ayales and U.S. Chargé d’Affairs Gonzalo Gallego at Casa Amarilla (Foreign Ministry) on Tuesday.
Under FATCA, Costa Rica’s financial institutions would report holdings of American citizens living in Costa Rica or face a 30% holding tax on payments from the U.S.
According to a U.S. Embassy San José bulletin dated June 7, 2013, ‘Under FATCA, U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS.’ Information for U.S. Taxpayers on Form 8938 Requirements
FATCA will require foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.[callout]The Treasury Department today posted text of a FATCA* intergovernmental agreement (IGA) between the United States and Costa Rica. The agreement is dated November 26, 2013. Read text of the Costa Rica FATCA agreement [PDF 231 KB 47 pages] [/callout]
U.S. citizens living in Costa Rica are not the only ones subject to FACTA, foreigners with legal residency in the US are also required to report their financial assets outside of the US. For example, a person born in Canada and emigrating to the US, obtaining legal status there and then moves to Costa Rica, is subject to the reporting. Even more, a Costa Rican having emigrated to the US and then retursn is still subject to FATCA reporting.
Financial assets in Costa Rica includes money earned through rental income, wages, professional fees, profits from investments, gambling winnings, pensions, etc.
Staring March 31, 2015, Costa Rica’s financial institutions (banks, cooperatives, finance companies, etc.) will have to start reporting to the IRS information about their American clients for the period 2013 and 2014. Starting in 2016, the reporting will be on all personal accounts with more than US$50.000 dollars and corporate accounts with balances of US$250.000 or more.
According to Ayales, the move is Costa Rica’s willingness to collaborate in the fight against tax evasion and money laundering.
Ayales added that the sharing of financial information will improve the country’s bad reputation as a tax haven, and bring Costa Rica at international banking standards.
Several blogs on the subject say FATCA has turned Americans into pariahs in the international financial world. Foreign financial institutions — banks, insurance companies and pension funds – are already turning away American clients due to the costly IRS reporting requirements and the perceived significant legal and financial risks.
Sources: Tico Times, El Financiero, US Embassy San José
Disclaimer: The statements published here are not to be construed as financial or legal advice. If you are a U.S. citizen or legal resident of the U.S. living abroad and have questions about how taxation applies to you, contact a CPA or an attorney.