Taxation of International Business
- In 2010, Congress passed the Fair and Accurate Credit Transaction Act (FACTA). It contains new rules concerning the taxation of international business. The purpose of FACTA was to clamp down on firms that were using their multinational status to keep from paying American taxes. Taxes are assessed on the income that derives from foreign investments, as well as the percentage of the investment that belongs to the American citizen.
- As of May of 2011, many FACTA rules have yet to become effective; some have, though. As of January 1, 2011, all sources of foreign income and all capital owned by the American citizen must be reported to the IRS. Prior to FACTA, the capital itself, its amounts, location, purpose and profits or losses were not normally reported. The assets located abroad must be at least $50,000 in value. The basic penalty is $10,000 per infraction and can be assessed up to $50,000 for repeated infractions.
- FACTA has also created a scheme enforceable by the U.S. Treasury Department, whereby foreign firms must report their American shareholders to the IRS. This provision of FACTA does not become effective until January 1, 2013. All foreign firms with American shareholders must report each of these shareholders to the IRS. Certain benefits, which have yet to be fully formulated, will accrue to all participating foreign firms, since there is no way to force foreign firms to comply with these laws. The purpose here is to keep close tabs on anyone trying to hide income through foreign investment.
- Economist Felix Lessambo reports that the IRS can use its famous Article 482 under certain circumstances to collect back taxes for "tax haven" investing. The basic condition is that the IRS must prove that the firm involved moved its assets, or specific transactions, to a tax haven such as Belize, the Cayman Islands, Andorra, Bermuda, Cyprus or Aruba. These places have a reputation of refusing to assist the IRS in its work, not requiring any tax or income information. In general, these countries have no real financial transparency. The IRS has taken action in order to punish such states that make it impossible to research these American-owned firms invested there. Article 482 is one such means to bring these firms to court. Proving that the only reason the firm moved to such places is to avoid taxes is often very difficult and technical.
