A dear reader named Ruth recently sent us the following question:

How does the Foreign Account Tax Compliance Act affect other nations doing business in Costa Rica, if at all? Do Canadians and Europeans have to be concerned with understanding this at all?

Hello Ruth, thanks for writing. The Foreign Account Tax Compliance Act (FATCA) is a provision of an American law that was passed by the 111^th United States Congress in the midst of the Great Recession. Before the law was passed, it was known as the Hiring Incentives to Restore Employment (HIRE) Act of 2010, and it was backed by President Barack Obama on the basis that it would curb the pesky unemployment rate in the U.S.

To get the second part of Ruth’s question out of the way: FATCA only applies to American taxpayers. The definition of taxpayer is not limited to citizens; under some circumstances, foreign-born residents of the U.S. can be subject to taxation.

Under the HIRE Act, an employer can get a nice tax break if he or she hires a worker who has been unemployed for at least a couple of months. If the employer does not layoff or terminate that workers after a year of employment, another tax break is granted. The HIRE Act came under attack by different interest groups that questioned how the tax break would be funded. After all, American taxpayers had already bailed out some of the world’s largest financial institutions and even major automakers in the heat of the global financial crisis. Enter FATCA.

As is the norm in many legislative and political systems around the world, a working proposal for a new law can be filled with provisions and surprises that seem to be completely unrelated to the matter being discussed, but legislators have a way to work them in nonetheless. These uncorrelated clauses may be attached by special interest groups, and a little lobbying, palm greasing or horse trading may be used in order to make them stick. The payroll tax breaks offered to American employers will be funded by FATCA, a modification to the U.S. Internal Revenue Code (the American compendium of cryptic laws and regulations).

How FATCA Works

Let’s say Ruth reads Henry David Thoreau’s Walden followed by Nadine Hays Pisani’s Happier Than a Billionaire and decides to move near Corcovado so she can be in peace among dantas (cute video). She is attracted by the advantages that Costa Rica extends to foreign retirees and decides to deposit her retirement income and liquid assets in an account at the staid Banco Nacional because she enjoys the long lines. Under the provisions of FATCA, if Ruth is an American taxpayer who holds $50,000 or more in her Banco Nacional account, she is expected to report those liquid assets to the Internal Revenue Service. If Ruth is a shareholder in a Passive Foreign Investment Company that has assets deposited in Costa Rica, she is required to report even more information. Furthermore, Ruth could be subject to a 30 percent withholding tax on her accounts, up to 40 percent fine assessed for failing to report or trying to hide her assets.

Implementation of FATCA sounds complicated, at least on the surface. Foreign banks must do all the heavy lifting by identifying if their account holders can be considered American taxpayers. If Ruth opened her account with a U.S. passport, then she is an American taxpayer. If she later becomes naturalized and gets a cedula with the number 8 as the initial digit, she could still be identified as an American taxpayer.

Implementation of FATCA in Costa Rica

In recent weeks, the U.S. Treasury Department announced that thanks to advanced electronic banking technology, the following countries have signed on to automated reporting of accounts held by American taxpayers: France, Germany, Italy, Spain, and the United Kingdom.

Officials at Banco de Costa Rica (BCR) have mentioned that they have implemented a committee to look at the impact of FATCA before they consider their next move. Such committee may imply bank executives attending meetings and conferences on the matter, which may take place in Miami, Orlando, and other places where Tico executives love to go on business junkets. Last year, Banco Nacional stated that it was starting to “see how it can analyze the different ways that the matter can take”, while private banks Citi and HSBC said they would await instructions by their headquarter offices (HSBC in Costa Rica had not yet been acquired at the time).

La Nacion reported back in October of last year that Costa Rican business entities that count with at least one American taxpayer as a partner or shareholder will be subject to reporting to U.S. tax authorities (the Internal Revenue Service, IRS). Financial consultancy firm Deloitte has expressed concern over the matter. Enrique Rojas, a tax expert at Deloitte, has stated that in relation to whether business entities in Costa Rica will sign an agreement with the U.S. Treasury: “It doesn’t matter if they have an American on board; the real question is: Do I have to sign?”