FATCA Repeal? Get With the Program!

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By Edward Tanenbaum, Esq.  

Alston & Bird LLP, New York, NY

Complicated. Burdensome. Costly. Intrusive.  Extraterritorial in its application. Indifferent and insensitive to foreign laws. These are among the complaints/arguments that we have heard from taxpayers and practitioners alike in calling for the repeal of FATCA (Foreign Account Tax Compliance Act) or a significant toned-down version of it. At least this is what we had been hearing in the very early stages of FATCA. Not much along these lines has recently been heard as the reality of FATCA has settled in.

But not so in some quarters. Recently, Sen. Rand Paul (R-Ky.) introduced a bill (S. 887) into Congress calling for the repeal of FATCA, in particular, §§1471-1474 of the Internal Revenue Code and an assortment of related Code provisions. Sen. Paul's stated reasons include issues relating to individual privacy, the infringement of basic constitutional rights, the disregard of sovereign laws of other countries, the reciprocal provision by U.S. banks of bank account information to foreign governments, etc. In the view of Sen. Paul, the FATCA provisions do not achieve the purpose of combatting tax evasion and, in fact, will discourage investment in the United States.

I'm not sure but did Sen. Paul get the memo? By that, I refer to the memo which highlights the changing world we are living in. Is FATCA perfect and will it completely eliminate tax evasion from the world? Probably not but it seems like the rest of the world has bought into the fact that it's worth the try. FATCA has been steamrolling through the continents, picking up steam as it goes along. Bank secrecy? Not much will be left of that in the coming days.

No doubt a lot has to do with U.S. resolve in this area. Publicity surrounding the UBS case and other bank investigations that actually led to the enactment of FATCA has awoken other governments to the realization that similar problems exist in their own jurisdictions and that the time had come to "toughen up" a bit. Voluntary disclosures in various jurisdictions have confirmed this view.

So, what have we seen happening on the worldwide stage? Earlier in the year, the United Kingdom had already begun taking steps to pursue FATCA-type agreements with its crown dependents and overseas territories and in April of this year five European Union (EU) countries, i.e., France, Spain, Germany, Italy, and the United Kingdom, announced the adoption of a FATCA-based pilot project involving the automatic exchange of information among these EU members. The exchange of information pilot program uses the FATCA Intergovernmental Agreements (IGAs) as the model to achieve the result. This group of countries is the same group that signed on to the initial draft of the Model 1 IGA with the United States.

The group invited the rest of the EU countries to join and it did not take long for the concept of tax transparency to take hold within the remaining member countries of the EU and even beyond. In fact, within days, additional countries signed on to the concept, e.g., Poland, Belgium, Czech Republic, Romania, the Netherlands, Anguilla, Bermuda, BVI, Montserrat, Turks and Caicos, Cayman Islands.  Singapore announced similar intentions to exchange information according to the standards of the Organisation for Economic Co-Operation and Development (OECD).

Then, in a sudden reversal of long-standing policy, Luxembourg and Austria succumbed to the pressure and announced that they, too, would agree to information exchange, although recently conditioning that agreement on the ability of the European Commission to work a deal with Switzerland, Liechtenstein, Andorra, Monaco, and San Marino so as to level the playing field. In fact, Liechtenstein has just signaled its willingness to negotiate an agreement with the EU calling for exchange of information. (Luxembourg has also just announced its intention to negotiate a Model 1 IGA with the United States.)

In addition, in early May, the tax authorities of the United States, Australia, and the United Kingdom announced a plan to share tax information regarding the numerous trusts and other entities holding assets on behalf of residents throughout the world. The three countries have obtained a substantial amount of data, including information about the identities of individual owners and the advisors who helped them establish the structures. The announcement comes amid a flurry of anti-evasion activity spawned in large part by FATCA. South Korea has announced that it, too, will join the party. 

Finally, in an attempt to thwart further indictments of Swiss banks by the Department of Justice, the Swiss Federal Council has proposed a framework agreement pursuant to which Swiss banks can conclude a deal with the United States which will call for the transfer of broad data and information regarding Swiss bank employees and third parties involved in the establishment of U.S.- owned Swiss bank accounts (although specific client data would be available only under the exchange of information provisions of the U.S.-Switzerland tax treaty).

So, it should be clear by now to everyone that cross-border cooperation and exchange of information are the hallmarks of the post-FATCA, anti-evasion environment. And it should not come as a surprise to anyone that FATCA, notwithstanding its complexity and 30% withholding tax hammer, is, of course, all about information exchange.

This commentary also will appear in the June 2013 issue of the  Tax Management International Journal.  For more information, in the Tax Management Portfolios, see Tello, 915 T.M., Payments Directed Outside the United States - Withholding and Reporting Provisions Under Chapters 3 and 4,  and in Tax Practice Series, see ¶7170, U.S. International Withholding and Reporting Requirements.

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