Once upon a time
In 2010 the US federal government needed money to finance their employment programs and came up with the Hiring Incentives to Restore Employment (HIRE) Act. The Foreign Account Tax Compliance Act (FATCA) enacts Chapter 4 of, and makes other modifications to, the Internal Revenue Code of 1986. It requires foreign banks to find any American account holders and disclose their balances, receipts, and withdrawals to the US Internal Revenue Service (IRS), or be subject to a 30-percent withholding tax on income from US financial assets held by the banks. Account holders of these assets maintained abroad are obliged to report them on their US tax returns if they are worth more than $50,000. The ones who don’t report are subject to a 30-percent penalty on the related account balance. FATCA also closes a tax loophole that investors had used to avoid paying any taxes on dividends by converting them into dividend equivalents.
From unilateral to bilateral
Faced with brutal force of the single left superpower international organizations, countries and affected financial institutions, labeled as ‘foreign’ and ‘alien’ went through the different stages of grief before acting themselves. The EU was paralyzed by a couple of countries unable at that time to release banking secrets or implementing local tax reporting. The five largest EU countries (UK, Germany, France, Italy, Spain) came up with a bilateral construct, the so-called Intergovernmental Agreement (IGA), in which:
- 30% withholding was lifted;
- direct reporting to the IRS was bypassed by reporting to local tax authorities, avoiding legal disclosure problems;
- a risk-based approach exempted several organizations and products from being labeled as an appropriate vehicle for tax evasion;
- reciprocity was agreed. Not only would country X report U.S. Persons for tax purposes maintaining financial accounts in X, but X would also get account details of X residents maintaining accounts in the U.S.
From bilateral to multilateral
In 2009 information exchange upon request became the international standard. The Global Forum on Exchange of Information and Transparency for Tax Purposes began monitoring the implementation of this standard through peer reviews. The Multilateral Convention on Mutual Administrative Assistance in Tax Matters and provide a basis for all forms of information exchange.
The OECD combined the Model 1 Intergovernmental Agreement (the one with reciprocity), European Union Savings Directive (EUSD), Automatic Exchange of Information (AEOI) with Treaty Relief and Compliance Enhancement (TRACE) and consulted its stakeholders. It delivered a standardized, secure and cost effective model of bilateral automatic exchange of tax data in a multilateral context. On 9 April 2013, the Ministers of Finance of France, Germany, Italy, Spain and the UK announced their intention to exchange FATCA-type information amongst themselves in addition to exchanging information with the US. On April 13 2013, Belgium, The Czech Republic , The Netherlands, Poland, and Romania also expressed their interest in this ‘son of FATCA’ or ‘European FATCA’, which by May 14 had already been endorsed by 17 countries, with Mexico and Norway joining the initiative in early June. On November 28, 2013 Luxembourg, Liechtenstein, Colombia, Greece, Iceland and Malta have automatically share information on UK taxpayers with HM Revenue & Customs through the G5’s pilot initiative launched by the G5 on automatic exchange of tax information.
Many of the countries mentioned are the ones that actually have signed an FATCA IGA with the US, are ready to sign, or have even enacted it in local laws (like the UK and Germany now have). The UK has set up another ‘son of FATCA’ by signing a FATCA-type IGA between the Isle of Man and the UK on October 11 2013, and Jersey and Guernsey on October 22, 2013, Gibraltar on November 23th, Bermuda and Montserrat on November 25th, Turks & Caicos Islands on the 27th
On 19 April 2013 the G20 Finance Ministers and Central Bank Governors endorsed automatic exchange as the expected new standard. OECD presented its approach to the G8 Summit in June 2013, and was promptly requested to finish the project by 2014. OECD didn’t reject this task in September 2013 when it met the G20 leaders again. The Business and Industry Advisory Committee to the OECD (BIAC) met with OECD in the week commencing 14 October to discuss at an operational level how to progress the plans that were set out in the Project Report. Financial institutions are impacted again and shared their worries: implementing the Common Reporting Standard in 2015 is unrealistic, since only in February 2014 or even mid-year final versions of specifications are expected. But, as with FATCA the initiative is endorsed and will be implemented, maybe after another 1-2 years. Four major implementation steps are now identified:
- Enact broad framework legislation
- Elect a legal basis for the exchange of information (OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters (Convention) instead of )
- Adapt the scope of the reporting and due diligence requirements and coordinate guidance to ensure consistency and reduce cost. It may include changes to the customer due diligence and tax reporting according to FATCA such as:
- Eliminating the de minimis thresholds that are contained in the Model 1 IGA.
- Changing the exceptions to reportable accountholders.
- Making appropriate modifications to due diligence procedures to remove US specificities.
- Develop common or compatible IT standards (The development of the reporting format is based on Standard Transmission Format and incorporates many elements of FISC 153, which is the standard used within the EUSD. The reporting schema and a first version of the related instructions are planned to be finalized within the second half of 2013. Local tax authorities, such as the Dutch Belastingdienst, are exploring this schema to merge with their current tax reporting schema.
Any escapes left?
Some think of FATCA being a the next thing the US brings to the world and simply refuse to do business with US Persons. In a flat world, this isn’t a sustainable business model when multilateral, international initiatives further limit escapes. Tax Identification Numbers (TIN) must be registered, as is mandatory for copies of identification certificates like a passport nowadays with many products. The OECD delivered an Action Plan on Addressing Base Erosion and Profit Shifting (BEPS) to the G20 Finance Ministers meeting in July 2013, setting 15 clearly identified actions that will result in a fundamental change to the international tax rules.
The report explains how these actions would significantly change the existing tax rules while at the same time ensuring the elimination of double taxation, which is detrimental to cross border investments. US centric elements will be removed from FATCA xml schemas, International Withholding Certificates introduced. Tax Identification Number (TIN) and Global Intermediary Identification Number (GIIN) will be superseded by International TINs and Single Euro Payments Area (SEPA) recently.respectively, as IBAN superseded local bank account numbers in the
In the meantime employment is stimulated in tax advisory services, IT departments, call centers and governments, not necessarily the target group of the original HIRE Act, unemployed Americans.