FATCA 11 Years Later – US Still the Tax Haven?

Since the passage of the Foreign Account Tax Compliance Act (FATCA) in 2010, we’ve been inundated with mountains of information about this legislation including its implementing Treasury Regulations, Internal Revenue Service (IRS) announcements and notices, reams of articles, books, blog postings as well as a Twitter-verse awash with FATCA-esque tweets.  Following FATCA’s roll-out, hordes of US persons began scrambling to become US tax compliant, many seeking tax compliance simply in order to expatriate and be done with the United States! Many who were rudely awakened by FATCA were the so-called “Accidentals” (I have a blog post category especially for them, the hapless “Accidental Americans”) who often faced greater problems. For example, many were (and still are) desperately trying to obtain Social Security numbers in order to become tax compliant.  A SSN is required to file a tax return, but alas, if you are over 12 years of age, have been living abroad and don’t have one (as is the case for most Accidentals), you will face a Herculean task to obtain it.

FATCA 11 Years Later

I recently had cause to examine the FATCA Intergovernmental Agreement (IGA) signed by the US and Sweden . It is representative of so-called Model 1A IGAs that have been negotiated between the USA and scores of other countries. My research revealed that in the 11 years since FATCA was enacted there has not been any change to the one-sided deal FATCA really brought to the table. Today’s post will focus on the “reciprocal” IGAs to which the US is a party under FATCA.  It will show that reciprocity is still lacking. The USA gets everything; its foreign IGA partners get almost nothing in return.  Yet, just like sheep, the foreign IGA partners meekly continue to go along with the program. As a result, many non-US persons will undoubtedly feel quite safe maintaining accounts at US financial institutions, despite FATCA “reciprocity” with their home countries. Simultaneously, many overseas Americans will continue to suffer the much publicized banking problems with overseas institutions who do not want to service them.

Peter Cotorceanu is the guru of all things FATCA and GATCA.  You can learn more about him at the end of my post. In his brilliant FATCA article “Hiding in plain sight: how non-US persons can legally avoid reporting under both FATCA and GATCA”, Peter so poignantly put it: “reciprocal is as reciprocal does.”

As for the USA? It didn’t then and it doesn’t now, 11 years later. Let’s have a closer look at FATCA “reciprocity”.  Starting at the beginning –

FATCA – What it Said, Why It Could Not Work

As originally drafted, FATCA was, simply-speaking, a one-way street. Under the FATCA regime, a foreign (non-US) financial institution, or FFI (e.g., a bank created and doing business solely say, in the United Arab Emirates) must provide significant amounts of financial data directly to the United States about any US persons holding accounts at the institution.  Reporting includes the name, address and taxpayer identification number of each US account holder; the account number; account balance and value; the account’s gross receipts and gross withdrawals or payments; and other account related information requested by the IRS. If the institutions do not comply, they will be hit with a 30% withholding tax on all payments from US-sources, including proceeds on sales of US stocks and securities (effectively cutting the institution off from any profitable US investment opportunities). Under FATCA, the United States is not required to give anything in return.

While FFIs were all too willing to provide the information in order to avoid the 30% withholding tax, most could not do so without being in violation of their home country’s data protection and privacy laws.  It would be illegal to send client information to a third party, even if that third party was the high and mighty US government. Violating the home country’s privacy laws could mean the institution would be shut down in the very jurisdiction where the financial institution was located.  Thus, this unilateral approach to FATCA was not workable and the US had to come up with a more palatable plan.  The US had to convince the governments of other countries to get on board and help ease FATCA’s implementation.  The fruit of this plan took the form of the so-called IGA.

Inter-Governmental Agreements

Briefly, there are two basic types of IGA:  Model 1 and Model 2.  FFIs that are covered by, and comply with, a “Model 1 IGA” will send information directly to their own government which will send it on to the IRS. Such an FFI will be treated as “deemed-compliant” with FATCA, and will generally not be subject to the 30% withholding.  FFIs located in a “Model 2 IGA” jurisdiction are required to enter into an “FFI Agreement” and report directly to the IRS.

By far, the majority of countries have entered into Model 1 IGAs.  Have a look at the Treasury Department website which lists out the countries that have entered into IGAs, or those treated as having an IGA in effect.  The information lists the type of Model each country has agreed to.

Model 1 IGAs – Not all are Created Equal

There are two versions of the Model 1 IGA: so-called Model 1A and Model 1B.  A Model 1A IGA provides for reciprocal information exchange between the United States and the partner jurisdiction. This means it’s a “tit for tat” agreement – well, kind of. The United States will (kind of) provide (some) information to the partner country about that country’s account holders in US financial institutions, and the signing partner will send the United States (reams of) information about US account holders at that country’s financial institutions.

A Model 1B IGA is not reciprocal. Only the signing partner country will send information about US account holders at that country’s financial institutions over to the US.  Typically, the country signing a Model 1B IGA has no need for information about financial accounts of its nationals or residents since the country imposes no income tax or has only a territorial income tax.  The United States and the United Arab Emirates (which has no income tax), for example, have signed a Model 1B IGA (non-reciprocal). This can clearly be seen by comparing Article 2 of the Model 1 reciprocal IGA with the one signed by the UAE. The UAE IGA follows the non-reciprocal IGA Model 1B for countries that do not have a tax treaty or tax information exchange agreement in place with the USA. This means that the UAE will send information to the IRS about US account holders at UAE financial institutions, but the US will not be sending information about UAE account holders in US financial institutions to the UAE.  Since the UAE does not impose an income tax, this information is not needed for tax enforcement.

The Treasury Department website does not provide information whether a Model 1 IGA is ‘reciprocal’. In order to determine this it is necessary to carefully examine the specific country’s IGA.

“The Sell”

Convincing the governments of other countries to agree to FATCA, while time-consuming, did not prove too difficult. The FFIs themselves were anxious to comply with FATCA so as not to be denied meaningful access to US markets.  The institutions put pressure on their local governments to play along.

The governments of foreign countries also had an incentive to get on board the FATCA Express. If these countries could get financial information from the US about their own nationals and residents, they could build up their own fisc with taxes from previously undeclared funds hiding in America.  Somehow, the countries with a stake in the financial data game had to convince the USA to “reciprocate” with information on financial accounts held by their taxpayers in US financial institutions.

This is precisely how the so-called “reciprocal” Model 1 IGA was born.

“The Short End of the Stick”

Foreign countries that signed a “reciprocal” Model 1 IGA with the USA got the short end of the reciprocity stick and things have not changed one bit.  The USA will not provide its ‘reciprocal’ FATCA partners any information about the following types of accounts held at US financial institutions:

Depository (i.e., cash) accounts held by entities. This includes entities that are resident in the FATCA partner country, or,

Non-cash accounts (e.g., brokerage accounts), whether held by individuals or entities, even those that are resident in the FATCA partner country, unless the accounts earn so-called US-source income.

Furthermore, the US will not provide information to its ‘reciprocal’ FATCA partner about the “controlling” persons of any entities having accounts in US financial institutions. This is so regardless of whether the entities are from the reciprocal partner country or from third countries, and even if those entities are owned and controlled by residents of the reciprocal partner country.

US-Sweden IGA: A Case in Point

I mentioned the US-Sweden IGA, which is typical of the Model 1A IGA. Look carefully at the Definitions in Article I at (bb) and (cc), respectively, and compare “Swedish Reportable Account” with “U.S. Reportable Account”; examine the duties imposed under Article 2 “Obligations to Obtain and Exchange Information with Respect to Reportable Accounts”.  A careful examination shows that Sweden basically gets nothing from the USA.  If the account holder is not a Swedish resident, Sweden really gets nothing! The US financial institution is not required to “look through” to the controlling persons of companies holding accounts at the US institution, yet, Swedish financial institutions clearly have onerous obligations in this regard and must carefully look for US persons behind any entity account holder.

Given the paucity of information that is being given by the US to its IGA “reciprocal” partner, it seems obvious that many non-US persons will continue to feel quite secure in holding accounts at US financial institutions, despite FATCA “reciprocity” with their home countries.   This is a wonderful boon to the US financial market in the brave new world of financial transparency. FATCA is still well poised to help the USA continue its reputation as an ever-enticing tax haven.

Peter A. Cotorceanu is the knowledge leader in  the FATCA and CRS industry for fiduciaries. A US tax attorney, a New Zealand barrister and solicitor, and a former US law professor, Peter is the Founder and CEO of G&TCA (GATCA & Trusts Compliance Associates LLC). Peter was previously Of Counsel to Anaford AG, a Zurich-based law firm, and the Head of Product Management for Trusts and Foundations for UBS in Zurich, where he was responsible for UBS’s FATCA compliance for trusts, foundations, and other fiduciary structures. Peter has written extensively and spoken around the globe on FATCA and CRS compliance for the fiduciary industry. His services to fiduciaries navigating these complicated and confusing regimes is unparalleled. Visit Peter’s website where you’ll find in one place all the tools fiduciaries need to implement CRS & FATCA. Simply.

Posted March 18, 2021

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