Finish Line Unclear for Some FATCA Pacts as Banks Worry

For over 50 years, Bloomberg BNA’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...

By Alison Bennett

Sept. 23 — A bumpy path may lie ahead for crucial agreements to ease the process for foreign banks to report their U.S.-owned accounts under a controversial law—even as IRS pressure grows for countries to get their pacts in force quickly.

Some countries face legal challenges to agreements under the Foreign Account Tax Compliance Act, while others may not be moving quickly. The lack of agreements in force is raising big concerns among global banks with operations in some jurisdictions that have fully functioning pacts and some that don't.

Known as intergovernmental agreements, or IGAs, the pacts allow overseas banks to transmit information on U.S.-owned accounts to their own governments, which then would share the data with the Internal Revenue Service at a high level. IGAs aren't considered to be in force until a country passes implementing legislation.

The alternative—directly reporting individual accounts to the U.S. or potentially facing a 30 percent withholding tax—is a major concern for cross-border financial institutions as difficulties continue in countries that haven't managed to get an IGA in legal force. According to Sept. 23 Treasury Department data, 113 countries have agreements, but 49 still need to reach the finish line.

Dozens Not Yet in Force

Belgium, China, Japan, Panama, Saudi Arabia and Taiwan are among the countries on that list. The Israeli government won a tough legal battle earlier this month for its IGA to go live, but it isn't yet technically in force.

Of the 49 agreements that still need to reach the finish line, 20 have been signed, including Belgium's pact. Twenty-eight are pacts in substance. Japan's IGA is treated as in effect without either of those statuses.

While some countries are racing to get their agreements in place, others may not be moving as quickly.

Tax attorneys said the Organization for Economic Cooperation and Development's common reporting standard may be draining energy and legislative resources in some jurisdictions. The CRS is a separate multinational system designed to allow financial information exchange across many borders.

More than 100 countries have signed on for that exchange. The U.S. can't fully adopt the CRS because of legal challenges. Some of those 100 countries have implemented CRS statutes before finalizing FATCA agreements.

Uncertainty Ahead

The uneven IGA landscape could be fraught with difficulties for banks, tax attorneys told Bloomberg BNA.

“A lot of financial institutions are nervous about what they'll do if countries get dropped off the list of IGAs,” said Tara Ferris, a former OECD adviser on automatic exchange of information. “They're exploring what they can do in a worst-case scenario.”

Even if banks want to register for direct reporting, in many cases they still face the legal prohibitions that led to the creation of IGAs, she said. In another challenge, financial institutions that have already made huge efforts to document all their U.S. accounts under their agreements would have to redocument them to comply with FATCA, said Ferris, now a financial services principal with Ernst & Young LLP.

“There's a lot of concern about what it's going to mean as far as impact,” said Denise Hintzke, global tax leader for the FATCA initiative at Deloitte Tax LLP. “If one of the entities in your group isn't in compliance, it can cause the whole group to fail.”

Banks now complying with IGAs could be hurt in other ways, John Harrington, a partner with Dentons US LLP, said. If the situation goes on much longer, it could lead to fairness issues. “They're worried about other banks marketing themselves that ‘We don't have to provide the information to tax authorities,' ” he said.

Countries With Initial CRS Information Exchange in 2017 Country IGA status CRS legislation status Anguilla Agreement in substance Codified Argentina None Codified Belgium Signed Codified Croatia Signed Codified Faroe Islands None Codified Greece Agreement in substance Not codified Greenland Agreement in substance Primary legislation codified Montserrat Signed Primary legislation codified Niue None Not codified Portugal Signed Primary legislation codified Seychelles Agreement in substance Codified Trinidad and Tobago Signed Not codified Compiled by Ernst & Young LLP from OECD and Treasury sources. Used with permission.
Yanking U.S. Investments?

Michael Plowgian of KPMG LLP said if the U.S. decides to treat an IGA as no longer in effect, that could be “tremendously disruptive.” Banks trying to register with the IRS individually face a struggle on their home ground, he said.

“These banks could face the prospect of withholding or of having to take their investments out of the U.S.,” said Plowgian, a principal in the International Tax Group of KPMG's Washington National Tax Practice.

The U.S. is working to even out the landscape.

During the controversial early days of putting FATCA in place, Treasury said it would treat pacts agreed in substance or signed as being in effect. However, those days may be waning.

Stepping up the pressure in late summer, the IRS gave those jurisdictions until Dec. 31 to explain the problems they are having and to submit plans to get their IGAs in force.

‘Firm Resolve' Required

In Announcement 2016-27, the agency said July 29 that the plans and explanations have to be detailed enough to convince the government those countries are serious about progress. The documents have to contain dates and “demonstrate firm resolve” to get their agreements functioning (147 DTR G-3, 8/1/16).

The IRS said it also would look at how countries behaved during IGA talks in deciding whether to stop treating their IGAs as being in effect.

Harrington said that option likely would have political and diplomatic consequences, and the IRS would probably consider that a last resort—something U.S. officials have said repeatedly.

At the same time, it appears the government's patience may be running thin.

IRS Seen Serious

Ferris said the U.S. is likely to back up the announcement with actions. “I don't think they would have published it if they weren't serious about it,” she said. “I very much see the possibility that if a country is not responsive they will be dropped off the list.”

At the same time, Ferris said she expects that other governments will try to follow the IRS's instructions in the announcement before the end of the year.

Treasury and the IRS both declined to comment.

Tax attorneys said the common reporting standard may be slowing the IGA process in some cases.

The CRS is a system in which dozens of countries exchange tax information with each other—but not quite the same information required under the U.S. law. It is yet another milestone in the hunt for tax avoidance throughout the world.

CRS Outpacing FATCA?

Ferris, who recently returned from a meeting of the OECD's Working Party 10, which handles CRS issues, said “it's definitely the case that some have gone ahead with CRS and not FATCA.”

A number of countries have enacted CRS legislation and have agreed to start exchanging information in 2017. They have IGAs that aren't yet in force. Belgium, Greece and Greenland are on that list, along with Anguilla, Croatia, Montserrat, Portugal and Seychelles

Ferris said many countries likely prefer the standard because they can get more information than under the U.S. law. The CRS calls for a fully reciprocal exchange of data, while the IRS is asking for more data from foreign countries than it can legally send back.

Plowgian called it “surprising that the CRS hasn't made it easier for other jurisdictions to bring their IGAs into effect.” At the same time, he said, the U.S. position that it isn't yet going to participate in the standard “may raise its own complications.”

U.S. officials have said their country isn't legally allowed to exchange the kind of information called for by the CRS, but Treasury has volunteered to help implement the standard to the extent it can. Ferris, who also served as Branch 8 senior counsel in the IRS Office of Associate Chief Counsel (International), said Treasury officials were participating in the OECD meeting she recently attended. She said it is clear that the U.S. wants to be an active part of the process.

The efforts go both ways, she said, with the OECD also assisting with IGAs. That said, the organization likely won't be actively helping countries respond to the IRS notice seeking details on implementation.

Looking Ahead

Attorneys told Bloomberg BNA that while countries will likely try to comply with the IRS notice, how the government will assess those responses is still an open question.

“The extent to which this is going to be an issue over the coming year depends on how aggressive the IRS wants to be,” said S. Douglas Borisky, counsel with Cleary Gottlieb Steen & Hamilton LLP. “The IRS is definitely saying, ‘It's time to get your act together.' ”

Whether the agency will start insisting on withholding “remains to be seen,” said Scott Michel, a member of Caplin & Drysdale Chartered. “That's part of a larger diplomatic palette and there are big considerations.”

Nearly all the attorneys interviewed urged countries to move quickly.

Alan Granwell, of counsel with Sharp Partners P.A., said he believes “if there isn't some movement, the IGAs will lapse,” and that jurisdictions need to speed their efforts to make it easier to comply with a complex law—one where noncompliance has harsh consequences.

“With IGAs, generally you have favorable rules about what happens if you make a foot fault,” he said. “It just seems to me that it would behoove everybody to take action.”

To contact the reporter on this story: Alison Bennett in Washington at abennett@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

For More Information

The Treasury web page outlining countries' progress on IGAs is at https://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx.

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.