The “General Explanations of the Administration’s Fiscal Year 2015 Revenue Proposals”, or the “Green Book” for short, has just been released (hat tip: Tax Prof Blog, of course — and it seems Just Me beat me to the story in a comment a few hours ago). It includes a proposal to “Provide for Reciprocal Reporting of Information in Connection with the Implementation of the Foreign Account Tax Compliance Act”, a.k.a. “DATCA”, beginning in 2016. There are also a half-dozen other proposals which may also be of interest to extraterritorial tax filers, most of which were also offered up last year but failed to pass.
The inclusion of a proposal in the Green Book by no means ensures its passage (witness previous failed attempts to repeal “check-the-box”, or just note all the similarities between last year’s Green Book to this one’s), and it also gives concrete form to something which up until now was vague and uncertain. That means there is now specific language around which domestic opposition can coalesce, which in turn may provoke international concern about the likelihood of getting any actually reciprocity from these IGAs their bankers are urging them to sign.
The proposal speaks of a “broad network of information exchange relationships with other jurisdictions based on established international standards”, to refer to what is actually about two dozen countries and a citizenship-based reporting standard that entirely contradicts the international standard of residence-based taxation and the evolving OECD standard of residence-based reporting.
It also claims that the IRS will only exchange information with “cooperative foreign governments in appropriate circumstances”. Of course, the vast majority of governments which have signed IGAs so far already have TIEAs for sharing “in appropriate circumstances”; the “reciprocity” offered by an IGA is supposed to enable automatic sharing without any assessment of whether the circumstances are appropriate or not. So perhaps you could call this language misleading. On the other hand, it may be an entirely honest description of how the IRS will offer FATCA “reciprocity” in the future: only for governments and cases which it deems “appropriate”. Countries whose relations with Washington are on edge, like Russia and China, may wonder whether that “appropriate” category would continue to include them if they signed.
Other provisions of interest
There are various other provisions that may also be of interest to extraterritorial tax filers. The Subpart F one and the two U.S. state tax things at the end are new proposals; the others are recycled from last year.
- “Create a New Category of Subpart F Income for Transactions Involving Digital Goods or Services” (p. 58) might affect emigrant technology entrepreneurs, though it only applies to digital goods developed by a related party and not by the CFC itself, so one-entity companies should be safe — presuming that you’ve been an employee of your company since the beginning with a contract specifying that what you’re creating is a work-for-hire owned by the company, rather than developing the intellectual property first and thinking you can “deal with the paperwork stuff later” (never a safe strategy for anyone subject to Form 5471 filings).
- “Expand the Earned Income Tax Credit (EITC) for Workers without Qualifying Children” (p. 139) may look tempting at first glance; however as an emigrant, you should be aware that trying to claim these kinds of credits from abroad could very well trigger an audit, and an audit can easily find some category of form crime that you committed and on which ruinous penalties can be imposed even when minimal or no tax is owed.
- “Reduce the Value of Certain Tax Expenditures” (p. 154) — I cannot figure out whether this affects the FEIE; however, note that it only applies to taxpayers in the 33% tax bracket and above.
- “Impose a Penalty on Failure to Comply With Electronic Filing Requirements” (p. 234) only applies to business taxpayers … for now.
- “Index All Penalties For Inflation” (p. 237) complains that “the amount of a penalty often declines for many years in real, inflation adjusted terms”, without noting that the FBAR and Form 8938 asset threshold — which generates so many failure-to-file penalties — also declines in real terms at precisely the same rate.
- “Allow States to Send Notices of Intent to Offset Federal Tax Refunds to Collect State Tax Obligations by Regular First-Class Mail Instead of Certified Mail” (p. 243). Overseas filers have already complained of not receiving tax notices from the IRS in a timely fashion or at all, and for those still subject to U.S. state taxes this will just add to their problems.
- “Allow Offset of Federal Income Tax Refunds to Collect Delinquent State Income Taxes for Out-of-State Residents” (274) — again, if you are subject to U.S. state taxes — or your long-ago state of residence thinks you are and has been sending angry letters to an address where you haven’t lived in years to try to inform you of its opinion — be careful.
The DATCA proposal
And now, without further comment, the DATCA proposal itself. I have added some paragraph breaks for readability.
Provide for Reciprocal Reporting of Information in Connection with the Implementation of the Foreign Account Tax Compliance Act
Under current law, U.S. source interest paid to a nonresident alien individual on deposits maintained at U.S. offices of certain financial institutions must be reported to the IRS if the aggregate amount of interest paid during the calendar year is 10 dollars or more. Withholding agents, including financial institutions, also are required to report other payments such as U.S. source dividends, royalties, and annuities paid to any foreign recipient.
The Foreign Account Tax Compliance Act (FATCA) provisions of the Hiring Incentives to Restore Employment Act of 2010 generally require foreign financial institutions, in order to avoid the imposition of a new U.S. withholding tax, to report to the IRS comprehensive information about U.S. account holders of financial accounts. For example, FATCA requires foreign financial institutions to report account balances, as well as amounts such as dividends, interest, and gross proceeds paid or credited to a U.S. account without regard to the source of such payments.
With respect to accounts held by certain passive foreign entities, FATCA requires the reporting of information about any substantial U.S. owners of the entity. Under FATCA and the Treasury regulations issued thereunder, foreign financial institutions generally include foreign depository institutions, custodial institutions, investment entities, and insurance companies that issue cash value insurance. Financial accounts are generally defined as accounts maintained by a financial institution, including, in the case of investment entities, certain debt or equity interests in the investment entity that are not publicly traded.
Reasons for Change
The United States has established a broad network of information exchange relationships with other jurisdictions based on established international standards. The information obtained through those information exchange relationships has been central to recent successful IRS enforcement efforts against offshore tax evasion. The success of those information exchange relationships depends, however, on cooperation and reciprocity. A jurisdiction’s willingness to share information with the United States often depends on the United States’ willingness and ability to reciprocate by exchanging comparable information.
The ability to exchange information reciprocally is particularly important in connection with the implementation of FATCA. In many cases, foreign law would prevent foreign financial institutions from complying with the FATCA reporting provisions. Such legal impediments can be addressed through intergovernmental agreements under which the foreign government agrees to provide the information required by FATCA to the IRS.
Requiring financial institutions in the United States to report to the IRS the comprehensive information required under FATCA with respect to accounts held by certain foreign persons, or by certain passive entities with substantial foreign owners, would facilitate the intergovernmental cooperation contemplated by the intergovernmental agreements by enabling the IRS to provide equivalent levels of information to cooperative foreign governments in appropriate circumstances to support their efforts to address tax evasion by their residents.
The proposal would require certain financial institutions to report the account balance (including, in the case of a cash value insurance contract or annuity contract, the cash value or surrender value) for all financial accounts maintained at a U.S. office and held by foreign persons. The proposal also would expand the current reporting required with respect to U.S. source income paid to accounts held by foreign persons to include similar non-U.S. source payments.
Finally, the Secretary would be granted authority to issue Treasury regulations to require financial institutions to report the gross proceeds from the sale or redemption of property held in, or with respect to, a financial account, information with respect to financial accounts held by certain passive entities with substantial foreign owners, and such other information that the Secretary or his delegate determines is necessary to carry out the purposes of the proposal.
The proposal would be effective for returns required to be filed after December 31, 2015.
“based on international norms” No, it certainly is not.
And clearly states the IGA’s are a way for other nations to break their own laws for the benefit of the United States. Which is clearly outrageous. The U.S. would not break their laws for the benefit of any other nation with no benefit to them whatsoever. If anyone tried something like this there would be a huge outcry.
That’s part of the reason the U.S. press has needed to paint this as a kumbaya moment for all these countries. They have stated how “eager” other nations were to do this when that was a blatant misrepresentation of the entire process. They have called themselves a “leader” and the reporting has looked exactly like what Xinhua news is accused of in China. No one outside the U.S. has been jumping for joy over this or “eager” to go along. Especially not Canada who put up quite a fight over it for a long time. Which of course is never reported on in the U.S.
If the U.S. does not go to the international norm of residency based taxation this is just going to get to be a bigger and bigger mess. Lots of other weasel words included in that draft but, this is enough for now. Pretty much what we expected.
I really do not get why they are so stubborn about CBT. They’ll put out press releases which are inaccurate, they will investigate renunciants, they will do everything except investigate and believe ACA, Nina Olsen and many other thousands of reports they’ve had about the real life problems this is causing innocent expat families who do not now nor would they ever owe any taxes.
One can only hope the Charter Challenge will result in the IRS suffering ‘data denial,’ by carving out at least resident Canadian citizens whether they’re a dual US / Canadian or not.
FATCA, DATCA, or any other name are pretty ineffective without data.
@Atticus, They are broke and want the penalties. Plus some people would owe actual taxes (retirees, disability income recipients, unemployment benefit recipients, investors, people who sold their expensive Canadian homes, etc)
Whether you agree with Russian troops in the Ukraine or not, however at least they have the nouse to threaten to confiscate US / European assets (whether that help’s Russia or not is debatable) to enhance their negotiation position somewhat in the face of sanctions.
It’s a shame the EU or Canada could infer they too may reciprocate with a withholding tax to offset FATCA’s 30%. They may not win in the long run, but it would get US banks hopping mad to lobby Congress to do something about it.
For me the Ukraine the US is losing influence in certain regions of the world which could spread globally in years to come.
See former comments on US hubris, US Pride, US won’t back down to save face. I see no other benefit of outdated US citizenship-based taxation (from the Civil War time and ‘entitlement’ of slavery) than an effective cash cow for collecting penalties (and tax in some cases that don’t “fit” into tax treaties and tax credits) from those slaves that left the US (the plantation). They are even saying that they are still entitled to be slave masters.
As “nervousinvestor” said in comment:
@calgary411 – Why don’t they tattoo every baby at birth ‘Property of the US Government.’ It’s no different. Also make it illegal to remove until the USG approves their renunciation.
…and Congress should pass US law that other countries have to tatoo those children born to US parents in other countries. Maybe the “foreign financial institutions” could take on that as well as their other duties with the US IRS.
the ultimate danger is that jurisdictions losing talented people will seek to impose CBT to recoup benefits paid with local taxes — think of Quebec that has the lowest post-secondary fees in North America, but has a net out-migration of talented multi-lingual people. Global, Reciprocal FACTA will enable Universal CBT
Thanks for posting this for separate attention. I had asked Tim to look for the DATCA language which I assumed would be in the budget, and he found it so I could post on my DATCA historical post you referenced. It is interesting, although only slightly, that it has move one page from 202 in last years Analytical Analysis, and is now on page 203. I, of course, had to put this up on Linked in, on the largest FATCA Compliance Complex Groups with a comment. “NO, YOU WILL NOT GET RECIPROCITY” from your IGAs. So, they can set aside that lame excuse for signing the IGA. 🙂
page 40-50 has some weird stuff too. “Pooling” which apparently means the opposite. Also, it seems that one of the other proposals is about whacking anyone with the gall to invest in a low tax country.
And Gold just keeps going higher and higher in value……
What is the timeline and process for getting these issues approved or rejected?
I had not realized that today is Ash Wednesday and had been stewing not being able to contact Banks and others who are overdue in reporting stuff back to me. I eventually got in a vehicle and drove to the Bank to find the shopping center parking lot empty. Feeling totally disoriented and wondering whether there had been some sort of “security” situation that I had not heard about, I asked a Security Guard and was reminded gently that today is a Public Holiday … it is Ash Wednesday. I feel so disconnected from reality being locked up doing tax returns and “fighting” as a Brocker on the Internet. Wow.
Now for something completely different. There are said to be more Jamaicans living outside Jamaica than there are living inside Jamaica due to huge emigration over the last 50 to 100 years (at times as political refugees like during the 1970s and often to seek economic opportunity such as building the Panama Canal, work at Guantanamo Bay, filling the multitude of positions, like at London Transport, looking for workers in the depleted population of Britain after WWII and to make use of educations obtained for which no employment options seemed available locally).
In Jamaica remittances to Jamaica by Jamaicans (and friends) abroad (mainly US, Canada, UK, Europe) amount to the largest (some years) source of net foreign exchange cash for the country. This money is coming largely from Jamaicans who have emigrated (legally or illegally) and are voluntarily sending back part of their after tax earnings to help support family, friends and to provide for their retirement in savings media (including accounts and real estate).
If Jamaica adopted US Style CBT the outflow from the US would likely increase dramatically and cause major political upheaval since Jamaicans are VERY vocal in US political parties and tend to rally public support and seem to punch above their weight class … LOL … even Rob Ford in Toronto has been known to use Jamaican “forty shilling” words (bad language).
I wonder if that would ever happen. Jamaicans are also very sensitive to anything that smacks of slavery and do not like “tiefin gubmint push han inna fi mi pocket”.
Thank you Eric for the post. Perhaps this will stir the US financial industry to seek a change.
This from PBS newshour last night, might give you the perspective of why the Obama budget is DOA in Congress.
Obama budget gets cool reception from GOP lawmakers
The video from last night is in the middle of the story…
And to deflect criticisms regarding the IRS Scandal, IRS Commissioner is challenged to justify handing out bonuses to IRS staff – all the while bemoaning a lack of funding.
Jack Lew brags – disingenuously and willfully – that finance ministers the world over just love FATCA:
…….”LEW: Senator, I guess I would point to some other things happening at the IRS that we, I think, on a bipartisan basis applaud over this same period of time. We’ve implemented FATCA, which is a law that passed with bipartisan support to make sure that we would have transparency across country lines so that illegal tax evasion could be stopped. The work done by our IRS on this has become the world standard. We now – I go to international meetings, and what I hear other finance ministers saying is we want FATCA for all. So we have done — we have people who have done fine work during this period, and I just think we have to recognize that it’s a large agency doing a lot of things.”……………
Of course, the IRS and US Treasury has now alienated and angered those living abroad – who are now working towards a possible legal challenge in Canada, but hey, what’s breaking a few million legal local post-tax nest egg accounts of families living (and often born) abroad if you want to keep those US homelanders diverted eh?
This deserves a post of its own!
That article by Alex, came out in the middle of some other news, and only got referenced in a comment thread. In light of the Ukraine actions, maybe it would be good to highlight it on its own. I don’t have time today, but some else is welcome to run with it.
Change I’d personally like to see happen to America
From Forbes today…
Explaining The Wormy Morass Of Obama’s FATCA Tax Evasion Law
Pingback: The Isaac Brock Society | Treasury prepares shiny new DATCA Trojan Horse
If that were to happen, Chears. I’d say we dig a deep bunker, stockpile food and arms and not come out, because I’m sure nukes would be flying in both directions. The US wouldn’t go down without trying to take everyone else with them. And the more I read about FATCA…Ukraine and now this Ebola outbreak. I’m just wondering if all the world is going down the road of annihilation. It’s a scary time to be in…and with having a “village idiot” at the helm of one of the most powerful and dictatorial countries in the world (I’m not referring to Putin here) that wishes to poke its nose into everything where it isn’t wanted, we’re heading for a conflagration.
I’m not sure if the Obama administration has made any progress with Congress regarding FATCA reciprocity since this post was published, but I’d like to refer you to the last line of the post:
“The proposal would be effective for returns required to be filed after December 31, 2015.”
Recently I perused a few of the Model 1 IGA agreements, and noticed that quite a few of the more recent ones (e.g. Czech Republic, Jamaica, South Africa, Mauritius) contain the following clause at the end of Article 3:
“This Agreement shall terminate on September 30, 2015, if Article 2 of this Agreement is not in effect for either Party pursuant to paragraph 9 of this Article by that date.”
Now I’m the first to admit that comprehending the endlessly recursive legalese of the U.S. Tax Code can make your head spin, and I invite others here to verify (or more likely refute) my conclusion here, but it appears to me that that a large number of IGAs will automatically terminate on 30 September 2015 unless DATCA is fully operational. Meanwhile the struggling effort to get congressional approval for DATCA is only aiming for compliance by 31 December 2015.
The Article 3 clause is quite explicit. There doesn’t appear to be any discretion on behalf of the parties. They will simply terminate.
Another thought on reciprocity:
I’ve read unbelievable estimates of the cost FATCA compliance for FFIs running into the billions for some of the larger banks alone. I thought these claims were somewhat hyperbolic until I read some of the relevant tax code,associated regulations, IGAs and FFI agreements. The compliance departments of FFIs will be relying more on lawyers and accountants than the IT department in this regard.
Anyway, my point is that this compliance burden is is purely for the identification of U.S. persons. DATCA’s compliance burden will currently require identifying residents of 35 Model 1 IGA partner jurisdictions, with another 60 or so in the works. I haven’t seen this asymmetry being mentioned elsewhere.
It’s my opinion that the U.S. financial industry (and their lobbyists) wield sufficient power to unilaterally kill FATCA; however, the biggest players in the industry might benefit as compliance costs crowd out the smaller players (more whales vs minnows). I’m curious to see how this plays out.