The US Treasury Department has put a booster engine on the Foreign Account Tax Compliance Act in the form of a new agreement with five European nations. Announced February 8, the agreement will enlist the nations in an automatic process of reporting possible tax evaders – and financial criminals – between nations. It is an important new initiative that may augment government tax revenues – and uncover hidden financial crime fortunes and fronts in the process.
The Foreign Account Tax Compliance Act aims to detect US persons who evade US taxes by hiding assets in accounts and other devices at foreign financial institutions. The law will require those institutions to identify US account holders and inform the Internal Revenue Service, with penalties incurred if institutions fail to report.
The law is not winning popularity contests at many foreign and US financial institutions, even after the IRS recently issued 389 pages of proposed regulations that clarify FATCA’s requirements and delay its implementation. The law and its accompanying regulations will add significant compliance duties to financial institutions worldwide, and some foreign financial institutions have already taken the easy way out, telling United States accountholders that they can take their business elsewhere.
Opponents of FATCA are a diverse group, encompassing several bankers associations, US expatriate groups, and government agencies of other countries. They claim FATCA is unwieldy, unfair and possibly unworkable.
A new direction in multinational tax evasion crackdown
The US Treasury Department has responded to these complaints in a way that points to a new direction in international efforts against tax evasion. On February 8, it unveiled a tax information-sharing agreement with France, Germany, Italy, Spain and the United Kingdom. Born from bilateral talks on FATCA implementation, the “reciprocation agreement” establishes procedures for the ongoing exchange of tax information among the six nations. The IRS will know the names of US citizens that have accounts in Germany, for example, as well as their account balances and other details, without the need to request the information officially as part of a criminal case or other action.
“It’s fair to say this agreement is quite revolutionary and not precisely patterned after anything we’ve seen in this area,” Susan Morse, a professor at University of California Hastings College of Law told ACFCS. She is the author of the recent article “Ask for Help, Uncle Sam: The Future of Global Tax Reporting,” published last month in the Villanova Law Journal.
The agreement may provide the US with a blueprint for broader international cooperation for cross-border gathering of tax information and financial crime proceeds to boot.
FATCA will require considerable data about offshore accounts of US citizen
Enacted in March 2010, FACTA requires financial institutions outside the US, including banks, broker-dealers and investment firms, to report substantial information to IRS about account held by US citizens. They must provide names, addresses, tax identification numbers, account balances, and annual receipts and withdrawals of US citizen customers. Starting in January 2013, foreign institutions must register with the IRS as covered entities. Those that fail to report will face a 30 percent withholding tax on any payments or income due to them in the United States.
FATCA’s critics say the technical difficulties of constructing a withholding procedure for non-compliant banks are enormous. Many foreign institutions also face the prospect that reporting customer information to the IRS may be a violation of their home country’s privacy, bank secrecy or data protection laws. The new agreement is intended to address and mitigate these concerns for the nations involved.
Five European nations will get vital IRS help under Reciprocation Agreement
The six-nation agreement obviates legal conflicts for financial institutions by having them report the required information to their own authorities. The institutions would not be required to register separately with the IRS. They would be considered FATCA-compliant by reporting information to their home country’s agency, and would not be subject to the 30% withholding tax on payments due from the US.
In turn, the IRS would share comparable data with the signatory nations. The US Treasury says it will be “collecting and reporting, on an automatic basis… information on the US accounts of residents of the FATCA partner country.”
Pact goes beyond present treaties, signaling new era in international tax cooperation
The Treasury points out that the agreement builds on a preexisting legal framework. “The United States already has a network of agreements providing for tax information exchange with more than 60 countries…,” Emily McMahon, the Treasury’s acting assistant secretary for tax policy, told a gathering of the New York Bar Association in February. “The laws of those countries already permit the transmission of U.S. account information, like that required by FATCA, from the foreign government to the IRS,” she added.
Unlike existing tax treaties, the agreement establishes a regularity of information-sharing among multiple countries. The only tax information-sharing arrangement that is remotely comparable is a 1980 treaty between the US and Canada. Otherwise, the United States and bilateral treaty signatories share tax information only when requested as part of pending legal proceedings, including criminal investigations. The routine, regular sharing established by the agreement removes the need for specific requests and makes sharing a predictable process. It is a different approach than the tax reporting system initially contemplated by FATCA, and is a notable expansion of international cooperation to counter tax evasion.
No timetable set for exchange because laws, regulations may need amendment
The six nations have not announced a schedule for implementation of the agreement. It may be a lengthy process, requiring changes in laws and regulations in all affected countries. The European nations must modify a 1998 EU law, the Data Protection Directive, that prevents the type of information sharing contemplated by the agreement.
Regardless, the US Treasury already hopes to use the six-nation agreement as a model for a wider international accord. McMahon alluded to “multilateral, global approaches to the exchange of financial account information for tax purposes,” and stated that the Treasury hopes to involve more countries in similar tax-information sharing arrangements in the near future.
Morse, the University of California-Hastings law professor, says it is in the best interest of the United States to achieve broad international cooperation on tax evasion. She believes it would be unwise and probably impossible for the US to make FATCA work on its own.
“It’s my view that the US cannot unilaterally enforce FATCA– for example, it would be loath to really make use of the punitive 30 percent withholding tax,” says Morse, “and so I think this is a very positive development, a good step on the way to building an effective global reporting system.”
Financial institutions will be global tax gatekeepers and sources on financial criminals
Estimates of the true cost of tax evasion are difficult and imprecise. The Tax Justice Network pegged the annual tax revenue loss from unreported offshore accounts at $255 billion worldwide. A University of Michigan researcher estimated that tax evasion through foreign accounts costs the US $50 billion a year.
Tax evasion and other financial crimes, including money laundering, corruption and fraud, are interlinked. The interplay of tax evasion and other financial crime has been recognized by international counter-financial crime organizations, like the Financial Action Task Force, which recently revised its 23-year-old “40 Recommendations” to include tax crimes as a predicate offense to money laundering prosecution.
With so much at stake, the United States and other developed nations can be expected to further tighten the net on tax evasion, and employ banks and other financial institutions to do so.
“There is an emerging consensus that financial institutions will be tax intermediaries cross-border,” says Grinberg. FATCA is not the only international effort to enlist financial institutions as collectors and reporters of tax information. A similar piece of legislation in the EU, the Savings Directive, requires financial institutions to report details on account holders between certain member nations of the European Union. The OECD’s Treaty Relief and Compliance Enhancement Group, an intergovernmental advisory group on taxation across borders, has also advocated measures that would make tax information reporting by financial institutions a central element of international cooperation on tax issues.
For financial institutions, this means more compliance rules, know-your-customer requirements and regulatory structures are likely, if not inevitable.
For financial criminals, FATCA, the resultant tax information- sharing agreement, and the increasing international focus on tax evasion undoubtedly mean a visit or call to their well-paid financial consultants and money launderers has already been made.