Global embrace of FATCA continues as secrecy havens, others succumb to growing world pressure

Maybe it’s the recognition that uncovering hidden accounts in other countries is a key element of combating all types of financial crime.

Maybe it’s public outcry at the fact that wealthy persons can escape taxation by opening accounts outside the view of their tax collectors, reinforced by the startling revelations of the International Consortium of Investigative Journalists that the powerful, rich and famous of many countries had hidden untaxed wealth in offshore accounts.

Maybe it’s a reaction by cash-starved governments suffering from the world recession of the past five years and scrambling for sources of revenue.

Whatever the reasons, one thing is clear: In more than a generation, few laws have meet with such extensive global adoption as has the US Foreign Account Tax Compliance Act of 2010 (FATCA). This law, in essence, requires all non-US financial institutions to report the US Internal Revenue Service information on accounts they hold for US persons.

The predictions by FATCA’s critics that it would have a quick demise and that it would get a frosty reception in other countries, especially in long-standing tax and secrecy havens, are looking increasingly hollow.

Instead, in nation after nation, including some viewed as secrecy havens such as Luxembourg, the resistance to FATCA has inexorably been overcome. Large nations, led by the United States, have banded together to apply pressure on smaller nations and secrecy havens to join the international movement.

In some cases, these FATCA advocates are facing criticism because some of their affiliated jurisdictions are regarded as secrecy havens in their own right, such as Great Britain with the British Virgin Islands and the US with its states of Delaware and Nevada, among others.

The embrace of FATCA by national governments has reached the point where several European Union nations are seeking a system of automatic exchange of financial account information to detect and pursue tax evasion. The US law, along with the international agreements it is spawning, is creating a template for a wider global system for exchanging financial account information on an ongoing and automatic basis.

“We’ve had unprecedented global advancement on bilateral/multilateral automatic tax exchange of information initiatives and agreements in the past few months,” says Alan Granwell, partner and FATCA expert with DLA Piper in Washington, DC.

Pace of FATCA activity is gaining speed globally

Last week at a press conference in London, French Finance Minister Pierre Moscovici said he was “favorable to the introduction of a European FATCA.” Together with German Finance Minister Wolfgang Schaeuble, Moscovici said he was urging the European Commission to act “very fast” on a tax reporting system that covers the entire European Union.

Days later, at a May 22 summit in Brussels, the European Council announced measures to strengthen tax reporting and financial transparency across the European Union. The Council is composed of the heads of state of all 27 European Union member nations and sets policy and standards for the EU.

In a communiqué on the results of the summit, the Council said “priority will be given to efforts to extend the automatic exchange of information at the EU and global levels.”

“At the international level, building on ongoing work in the EU and on the momentum recently created by the initiative taken by a group of Member States, the EU will play a key role in promoting the automatic exchange of information as the new international standard,” the Council pronounced. It was referring to a recent agreement by France, Germany, Italy, Spain and the UK to build a financial account exchange system modeled partly on FATCA.

European nations view FATCA accords as basis for international tax system

The Council also called for increased reporting by affected businesses on the beneficial owners of companies and trusts. It said this transparency in legal entities is “essential” to “deal with tax evasion and fraud, and to fight money laundering.”

In April, European Council President Herman Van Rompuy estimated that EU nations lose $1.3 trillion annually to tax evasion and aggressive tax avoidance by companies and individuals.

To facilitate implementation of FATCA, the US Treasury Department and IRS have developed “Intergovernmental Agreements (IGAs)” that set out implementation steps for signatory nations.

Two templates of IGAs, known as Model I and II, have been developed. Model I allows non-US institutions to report financial account information to their nation’s tax authority, which then transmits it to the IRS. Model II requires non-US institutions to register directly with the IRS to report information on their US financial accountholders.

So far, the Model I IGA has proved the most popular. Denmark, Ireland, Mexico, Norway, the UK and now Spain having signed on as Model I partners. Only Switzerland has signed a Model II agreement. The US Treasury has said it is negotiating IGAs with about 70 other nations.

“From the inception of IGAs in 2012 to where we are now, there has been an explosion of proposed initiatives and agreements for bilateral and multilateral exchange of information, which is beyond belief,” says Granwell.

Most Model I IGAs call for reciprocal reporting of tax information, though not all are reciprocal. This means US institutions will be required to gather financial account information on persons who are taxpayers in nations that sign these FATCA IGAs. They will be required to transmit this information to the IRS for reporting to the pertinent nation’s tax authorities. As the number of IGAs grows, US financial institutions will face the challenge of continually updating their customer identification and data collection procedures when FATCA reporting becomes mandatory next year.

Spain signs IGA, but reciprocity issues delay France, Germany

On May 14, Spain became the latest nation to join in FATCA’s global spread when it signed a Model I IGA. Spain had indicated its support for FATCA in a “Joint Statement” last year with four of the largest economies in the EU, France, Germany, Italy and the UK.

The UK is the only other nation of the five to sign a FATCA IGA thus far. Germany and France are reportedly delaying the signing of their IGAs while they negotiate for greater reciprocity from the United States in the information they would receive from US institutions, according to attorneys who specialize in FATCA issues.

“Many countries have said ‘what’s good for the goose is good for the gander,’” says Brian Mahany, an attorney and FATCA specialist with the firm of Mahany & Ertl in Milwaukee, Wisconsin. “But at the end of the day, we’re still a very powerful country, and other nations don’t want their financial institutions to be at a competitive disadvantage.”

One key subject for Germany and France is said to be the identification of “substantial owners” of accounts. Under FATCA, non-US institutions are required to identify and report not only accounts held directly by US persons, but also accounts held by entities with “substantial” US owners. “Substantial owners” are defined as the direct or indirect owners of more than 10% of a company’s stock, or the recipient of more than 10% of the profit or interest from a partnership.

Under the terms of the IGAs that have been signed thus far, US institutions are not required to identify substantial owners of accounts of persons from other nations. While Germany and France have not issued public statements on this subject, some experts say this imbalance in reporting obligations is delaying the execution of IGAs, as the countdown toward FATCA’s first mandatory reporting obligations approaches in January 2014.

Singapore and Russia say FATCA IGAs are imminent

Other countries have announced they expect to conclude IGAs soon. On May 17, Anton Siluanov, the Finance Minister of Russia, said Russia was close to finalizing an IGA with the US and that representatives would be meeting soon to work out the specifics. On May 14, as the ink was drying on Spain’s IGA, the Inland Revenue Authority of Singapore announced plans to enter into a Model I IGA with the US.

Singapore’s announcement is particularly notable because it is increasingly an international destination for offshore wealth. A recent study by the London financial research company WealthInsight says Singapore is the world’s fourth-largest offshore banking center in the value of assets under management. Its offshore banking and wealth management sector is the world’s fastest-growing, holding $450 billion from persons outside the country at the end of 2011, compared to $50 billion in 2000.

Holdouts to FATCA disclosures among the world’s principal tax and secrecy havens remain, but the assent of Switzerland and now Singapore to FATCA IGAs may signal the beginning of the end of such havens.

“We’re moving closer and close to a worldwide system of tax information exchange,” says Mahany. “I don’t know if it will be based on FATCA. But even if not, FATCA is not going to go away.”

Read the European Council’s Conclusions on Taxation here