Under FATCA, U.S. taxpayers with specified foreign financial assets that exceed $50,000.00 must report those assets to the IRS. Failure to report on these assets will result on discovery of the infraction, of fines and penalties ranging from $10,000 to $50,000. Further underpayment of taxes that resulted from non-disclosed financial assets will result in a penalty of 40% of these assets. In addition, FATCA will require foreign financial institutions (FFI's) 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 (FE's)."
St. Maarten's Minister of Finance said to properly comply with these new reporting requirements, a FFI will have to enter into a special agreement with the IRS by June 30, 2013, under which amongst other requirements a FFI will have to report annually its accountholders who are U.S. citizens or foreign entities with substantial U.S. ownership and withhold and pay to the IRS 30% of any payments of U.S. source income. Another option is to enter into a treaty between the US and relevant countries. Tuitt said St. Maarten are looking in to several options as to how the Government of St. Maarten will tackle the issue since it will directly affect St. Maarten's economy. He told members of the media that one option might be to piggy back on the agreements that are made between the Netherlands and the United States, but no final decision has been taken on the matter.
FATCA will have a major impact on US taxpayers living in Sint Maarten and the business of Sint Maarten, Tuitt said and it is extremely likely that the cost of implementing FATCA, which will be borne by the FFI's, will by far outweigh the revenues raised by the US Treasury, even excluding the additional costs to the US Internal Revenue Service for the staffing and resources needed to process the data received.
He further explained that measures has been taken by some European institutions to combat the effects of the FATCA, however Sint Maarten cannot do much against this because it is a small island entirely dependent on the US economy.
Some FFIs worldwide are already turning away U.S. citizens and closing their existing accounts; their business is not worth the hassle anymore.
The effect of FATCA on US taxpayers in Sint Maarten
FATCA exposes Sint Maarten residents who are US citizens or green card holders and FE's in Sint Maarten, to the possibility of increased reporting obligations to the IRS and severe penalties for non-compliance. There are fears of imposition of capital controls, and as a result capital flight can very well be underway. After all, FFI's may consider leaving Sint Maarten in order to settle in a non-compliant country. There have also been privacy concerns, in particular for those with dual citizenship. In an era of common dual citizenship, it is impossible for a FFI to definitely know whether any of its clients is also a U.S. taxpayer (i.e., citizen, green card holder, etc.).
The effect of FACTA on FFI's of Sint Maarten
The IRS uses a broad definition of a financial institution. It is clear that beside banks, insurance companies, pension funds and investment funds are covered. In other words, most of the financial sector in Sint Maarten falls under the scope of the FATCA legislation.
Although the measure at first sight is based on good intentions and the only focus seems to be on American citizens, it goes much further. All financial institutions and investment companies that have investments and income in the United States are affected by this measure. Beside the banks, all insurance companies, pension funds, asset managers, private equity funds and other collective investment institutions will be affected. In order to comply with the rules on the first of January 2013, these financial institutions must have measures in place to shape their existing systems and business processes in a way that they facilitate compliance with FATCA. These adjustments require a lot of time and money.
From the above it can be concluded that Sint Maarten will also bear the brunt of American Legislation. In the formulation of a response to it, the Government of Sint Maarten will carefully examine the options that are available with a view to settling on a solution that will serve in the best interest of the business and people in Sint Maarten.