(Miami Heat’s LeBron James Reuters Photo)
FATCA may become a victim of its own success in mobilising action for the wider adoption of automatic exchange of information, as a means of arresting tax evasion and increasing transparency in the global financial system.
Despite progress made by the U.S in concluding inter-governmental agreements (IGAs) to give effect to this extra-territorial extension of this domestic tax law; at home and abroad, opposition is growing against the US Foreign Account Tax Compliance Act.
Earlier this year on May 7, US Senator Paul Rand introduced a bill to repeal FATCA. In a letter to his Senate colleagues, Dr. Paul, the Republican representative for Kentucky, argued that FATCA “has had the practical effect of forcing Foreign Financial Institutions to relinquish any association with American customers, and to avoid direct investment in the United States. It goes without saying that overseas investment in the U.S. is an important engine of our economic growth and prosperity. FATCA endangers an estimated $25 trillion in foreign capital currently invested in the U.S.” More here and here.
Importantly too, the debate around the bill has highlighted the concerns of US expats living abroad about the US’ antiquated model of taxation based on mere citizenship and absent the taxpayers’ real connection to the US.
The European Union (EU) has developed its own FATCA style legislation by making amendments to it European Union Savings Taxation Directive (“EUSTD”). The Directive is meant to ensure the effective taxation of savings income throughout the EU and requires its member states to report tax information on savings income.
First proposed in 2008, the amended Directive was opposed by several EU member states as it sought to expand the definition of savings income, close loopholes to make it more difficult to avoid reporting requirements, create a mechanism for the automatic exchange of tax information, and set up public registers of publish of company beneficial ownership.
For several years, Austria and Luxembourg successfully blocked these amendments but were recently forced to withdraw their objections to the amendments in light of the growing momentum behind FATCA, the collapse of the banking system in Cyprus, and the need for increased tax revenue because of growing budget deficits in the EU. The EU now intends to have the revised EUSTD in place by year-end.
The EUSTD will marginalise the US FATCA because its preamble clarifies that pre-existing law prohibits an EU member state that provides “wider cooperation” to a non-EU country from refusing to provide such wider cooperation to an EU member state. This has important implications for EU member states such as the United Kingdom and Spain, which have already signed IGAs with the United States. As a result, several EU member states either now have or will have a legal obligation to provide the same level of “wider cooperation” on tax information exchange to other EU member states, most likely as set out under the terms of EUSTD.
In its report to the G8 Summit last month, the OECD repeated the advice of the G20 Ministers of Finance and Central Bank Governors which strongly encouraged all jurisdictions to sign or express interest in signing the Multilateral Convention on Mutual Administrative Assistance in Tax Matters; and called on the OECD to report on progress. This may lead many more countries to become interested in using this multilateral FATCA model especially since it looks set to be backed by the threat of economic sanction for non compliance by the G20. More here and here.
While it is clear that FATCA-style reporting, regardless of the model used, will not alleviate the growing concerns about privacy, by effectively “deputizing foreign entities to enforce U.S. tax law” the Obama regime has turned the tide away from bilateral solutions to the challenge of exchange of information to a wave of multilateral approaches.