Global Enforcement of FATCA: Something to Worry About

The Foreign Account Tax Compliance Act (FATCA) is about disclosure and transparency, but in part is to catch Americans trying to stash money overseas. Controversially, FATCA orders every foreign bank to track down its U.S. account holders, and then share those account holders’ balances and receipts with the IRS.  Uncooperative foreign banks are subject to a punitive 30% withholding tax.

The U.S., along with the United Kingdom, France, Germany, Italy and Spain issued a Joint Statement on an intergovernmental approach to implementing FATCA and improving international tax compliance. That indicates that the U.S. is getting more countries on board with the policy.

The U.S. and five key nations are joining hands on joint efforts against tax dodgers. The U.S. is the big winner, but there is something for the group of five nations too. The U.S. is willing to reciprocate in collecting and exchanging data on an automatic basis. That means key details on accounts held in U.S. financial institutions by residents of France, Germany, Italy, Spain and the United Kingdom will be transparent. The approach under discussion would enhance compliance and facilitate enforcement to the benefit of all parties.

The Joint Statement said:

“FATCA, however, has raised a number of issues, including that foreign financial institutions (FFI) established in these countries may not be able to comply with the reporting withholding and account closure requirements because of legal restrictions. An intergovernmental approach to FATCA implementation would address these legal impediments to compliance, simplify practical implementation, and reduce FFI costs. Because the policy objective of FATCA is to achieve reporting not to collect withholding tax, the United States is open to adopting an intergovernmental approach to implement FATCA and improve international tax compliance.

In this regard the United States is willing to reciprocate in collecting and exchanging on an automatic basis information on accounts held in US financial institutions by residents of France, Germany, Italy, Spain and the United Kingdom. The approach under discussion, therefore, would enhance compliance and facilitate enforcement to the benefit of all parties. The United States, France, Germany, Italy, Spain and the United Kingdom are cognizant of the need to keep compliance costs as low as possible for financial institutions and other stakeholders and are committed to working together over the longer term towards achieving common reporting and due diligence standards. In light of these considerations, the United States, France, Germany, Italy, Spain and the United Kingdom have agreed to explore a common approach to FATCA implementation through domestic reporting and reciprocal automatic exchange and based on existing bilateral tax treaties.”

The Joint Statement indicates that the United States, France, Germany, Italy, Spain and the United Kingdom would commit to working with other FATCA partners, the OECD, and where appropriate the EU, on adapting FATCA in the medium term to a common model for automatic exchange of information, including the development of reporting and due diligence standards.

So the Joint Statement did a couple of things:

“Commit to reciprocity [with those five FATCA partners] with respect to collecting and reporting on an automatic basis to the authorities of the FATCA partner information on the U.S. accounts of residents of the FATCA partner.”

With the Joint Statement, then, FATCA will become an instrument for U.S. bilateral automatic exchange of information. The Assistant Secretary for Tax Policy of the U.S. Treasury Department recently stressed the importance of reciprocity:

“The U.S. Treasury Department sees no principled basis on which to require that financial institutions based in other countries collect and provide us with information on U.S. taxpayers, if we take the position that our own institutions should be exempt from similar requirements. To the contrary, we believe that it will be critical to the success of our efforts to implement FATCA that we are able to reciprocate.”

The Joint Statement also simplified the administrative procedures for FATCA, so that FFI’s would provide to the respective foreign government the required information, and the respective foreign government would provide that information to the U.S. Government. In the Joint Agreement, the U.S. agreed to:

• Eliminate the obligation of each FFI established in the FATCA partner to enter into a separate comprehensive      FFI agreement directly with the IRS, provided that each FFI is registered with the IRS or is excepted from registration under the agreement or under IRS guidance.
• Allow FFIs established in the FATCA partner to comply with their reporting obligations by reporting      information to the FATCA partner rather than reporting it directly to the IRS.
• Eliminate U.S. withholding under FATCA on payments to FFIs established in the FATCA partner (i.e., by      identifying all FFIs in the FATCA partner as participating FFIs or deemed-compliant FFIs, as appropriate);
• Identify in the agreement specific categories of FFIs established in the FATCA partner that would be treated,      consistent with IRS guidelines, as deemed compliant or presenting a low risk of tax evasion;

The Joint Statement and the GAO Report are evidence that progress is being made toward automatic exchange of tax related information, on a step-by-step basis. This may be a more realistic approach than aiming for an immediate multilateral convention requiring automatic information exchange, which some have been calling for.

The five U.S.-tied countries support the underlying goals of FATCA. That segues nicely into the concerns whether some FFIs may not be able to comply with reporting and withholding requirements because of their own foreign country legal restrictions. In many cases, existing tax treaties will be used so FFIs can turn over information to their own governments rather than to the IRS directly.

What if the laws are not in place to require FFIs to hand over data to their governments? The five nations will pursue such laws. Then the governments can swap data with each other, and tax dodgers get caught.  For its part, the U.S. will ease up on the FFIs and not require separate agreements as long as FFIs are registered (or exempt), and as long as the U.S. is getting the info from the foreign governments.

Taxpayers with undisclosed foreign accounts should be a concerned about FATCA’s far reaching implications. As a result, Taxpayers with undisclosed foreign accounts should consult a competent tax lawyer and consider participating in the 2012 OVDP program. Although the 2012 OVDP penalty regime may seem overly harsh for many, the decision to participate should include an economic analysis of the taxpayer’s projected future earnings that could be generated from the foreign funds. If a taxpayer is discovered before any voluntary disclosure submission, there could be harsh criminal (in addition to civil) penalties. The risks may outweigh the benefits.

Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.

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