Mexico, US Sign FATCA Agreement
by Mike Godfrey, Tax-News.com, Washington
23 November 2012
On November 19, 2012, in Washington, the Mexican Undersecretary of Revenue, José Antonio González Anaya, and the United States Assistant Secretary for Tax Policy, Mark J. Mazur, signed a government-to-government agreement for the bilateral implementation of the Foreign Account Tax Compliance Act (FATCA).
FATCA was enacted by Congress in March 2010 and is intended to ensure that the US tax authorities obtain information on financial accounts held by US taxpayers with foreign financial institutions (FFIs). Failure by an FFI to disclose information would result in a requirement to withhold 30% tax on US-source income.
FFIs across the world have all expressed concern about the legislation, particularly the changes to their systems it will entail, and the penalties that will ensue in case of non-compliance. Those concerns led the US Treasury to pursue government-to-government frameworks for implementing FATCA.
A government-to-government agreement, as signed between the US and Mexico, does not contain any exemption from FATCA, but, instead, a model for information sharing is offered based on existing bilateral tax treaties and allowing FFIs to report the necessary information to their respective governments rather than to the Internal Revenue Service.
The FATCA agreement has taken two years to negotiate between the two governments, and, while a copy has not yet been released, is said to be a significant improvement in the mechanisms for the exchange of banking and other financial information between the two countries.
In addition, after the signing of the agreement, the Mexican government believes that it is placed amongst the countries with the best practices for the exchange of information, as driven by the Organization for Cooperation and Economic Development and the G20.
*sigh*
Wikipedia:
The bandwagon effect is a well documented form of groupthink in behavioral science and has many applications. The general rule is that conduct or beliefs spread among people, as fads and trends clearly do, with “the probability of any individual adopting it increasing with the proportion who have already done so”. As more people come to believe in something, others also “hop on the bandwagon” regardless of the underlying evidence. The tendency to follow the actions or beliefs of others can occur because individuals directly prefer to conform, or because individuals derive information from others. Both explanations have been used for evidence of conformity in psychological experiments.
Falling like flies.
All you need to know about FATCA IGA’s:
http://www.youtube.com/watch?v=AOOs8MaR1YM
Thanks, Deckard.
If it weren’t so insanely sad, we could laugh.
Mexico is in an especially problematic position. There are many Mexican nationals working in the US, legally or otherwise, with bank accounts in Mexico, probably unreported, which they may use for remittances. The vast majority of these people are poor or of at best moderate means. They don’t have a lot of dough to snatch. It will be interesting to examine the text, when it is available, to see how they are treated.
Unrelated to the post above, but just in case others haven’t seen it. A short interview with the ACA about FATCA: https://www.youtube.com/watch?feature=player_embedded&v=eAYp3w_gXjM
She is well spoken.
And will Mexico actually get the information that it had wanted the US to provide for years? They had already approached Geithner, and he did not reply to their correspondence – in which they tried to enlist the US in stopping the flow of cash from Mexico to US banks – effectively laundering criminal proceeds and evading Mexican authorities by transferring the funds to US non-resident accounts.
See: http://www.taxanalysts.com/www/features.nsf/Articles/522A39903AFD6CFB8525761D004F113B?OpenDocument
‘News Analysis: How the U.S. Is a Tax Haven for Mexico’s Wealthy‘
by Robert Goulder
“As if Treasury Secretary Timothy Geithner didn’t have enough on his
plate, there’s one underappreciated problem his department now must
address. This latest headache can be summarized in three words: U.S.
bank secrecy.
The issue landed on Geithner’s desk shortly after he accepted his
current job, in the form of a February 9 letter from Mexican Secretary
of Finance Agustin Carstens. At first glance, its polite language seemed
innocuous…………
But six months later, Carstens’s letter — and how Treasury will
respond to it — has the potential to become a lightning rod for
controversy. That’s because the IRS and the Justice Department, after
decades of passive acquiescence, decided to pick a fight with Swiss
banking giant UBS, the world’s largest manager of private wealth.
At the heart of the UBS litigation is the U.S. government’s
newfound resolve to challenge Switzerland’s bank secrecy regime and end
the cross-border tax evasion it facilitates. Carstens’s letter raises an
embarrassing issue for Treasury given the timing of last week’s UBS
settlement, which made newspaper headlines here and abroad……
..It asks the U.S. government to offer Mexico the same exchange of
information terms the United States has with Canada. That’s significant
because Canada is a special case when it comes to cross-border tax
enforcement. Despite possessing one of the world’s most comprehensive
tax treaty networks, the United States has meaningful information
exchange with only one country: Canada.
Mexico has now put the U.S. government on notice: It wants in on
what’s previously been Canada’s exclusive arrangement. Should that
inclination spread to other governments across the hemisphere, it could
have extraordinary consequences for the U.S. financial sector. Think of
it as the fiscal equivalent of the H1N1 flu virus. (For Carstens’s
letter, see Doc 2009-5928or 2009 TNT 50-12.)”………..
So, does this mean that wealthy Mexicans will become customers of banks outside of the US? Now that’s justice.
Maybe this has been obvious to everyone but me so far, but if Canada was to sign an IGA, would it not in fact be the Canadian government versus the US’s forcing Canadian banks to adhere to FATCA?
Well it’s a good thing that American citizens in Mexico will now be paying their fair share. Look at all the great benefits they get by having the Full Protection of the United States Embassy and the United States Border Patrol:
http://www.elpasotimes.com/ci_22053899/trucker-released-from-mexican-prison-arrives-el-paso?source=most_viewed
They’re the US Government and they’re here to help! To get him out, all his family had to do was hire a international criminal attorney privately, go down to Mexico, and pay the fine. But the Embassy got him a passport, which is one of those great benefits you get by being a US Person abroad! And all he had to pay for it was $135! (Plus the lawyers’ fees).
@Eric – A heartwarming story, you have to suspect that it’s a bit of attention seeking by the Mexicans trying to draw attention to the problem they have with guns & ammo bought in the States and ending up in Mexico though…
p33t – I understand your thinking. But my feeling towards the US is nothing but distrust. If you don’t believe me, put yourself in a position where you are helping a good guy beat a bad guy that the US supports.
Example: http://en.wikipedia.org/wiki/Charles_Horman
What’s worse, if you dig enough, you’ll find loads of examples like this. I have always felt a bit relieved living in a country that isn’t concerned with world domination. I’ll be even more relieved when I have the passport to go with it and a cancelled US passport. I’m sorry; I’m not here trying to offend people. I just don’t want to be “American”.
@bubblebustin,
That’s how it seems to me — someone has to collect the information from USPs in Canada and from the financial institutions to be able to pass that onto the US IRS. The threat is just taken from the banks’ heads on the 30% to be withheld http://www.cba.ca/en/consumer-information/40-banking-basics/597-us-foreign-account-tax-compliance-act-fatca-information-for-clients. The IGA may be a little more “friendly” for the banks in where the have to report information and the withholding, but still a great cost to them and now to the CRA or whatever government department collects data to give to the US???
Middle-class Mexicans with ties to the States (there are a lot of them) who have worked in Mexico, have likely opened AFORE accounts, which are private retirement savings account created in Mexico by the law of 1997 by their Treasury (Hacienda). The accounts are created by employers who are in the Mexican social security system and are assigned to private banks and are in the name of the employee. Part of the the employees salary is put in that account. The employer may also contribute. The employee is free to contribute as he or she wishes. That is part of the reason why it is a private account. The Spanish page of Wikipedia explains it well, the English page leaves a lot to desire. http://es.wikipedia.org/wiki/Administradoras_de_Fondos_para_el_Retiro
In the Spanish version of the IGA announcement, AFORES will be informed about the new IGA. http://www.shcp.gob.mx/documentos_recientes_bliblioteca/comunicado_070_2012.pdf
Many Mexicans in the US who worked in Mexico as well as American expats who worked in Mexico on a contract have these accounts. There is almost no way to get rid of them before one is 65.
What is horrible is that even though these accounts essentially are associated with the Social Security system of Mexico, the IRS considers them PFICs. Even more horrifying is that most Mexicans in the US and expats who worked in Mexico have no clue that they have a reporting responsibility on these accounts.
The law firm that wrote the following article has approached the Hacienda about negotiating terms like those of an RRSP in the Tax Treaty with the US, but the bottom line is that there are higher priorities in the Mexican-US tax world.
http://www.lacba.org/Files/Main%20Folder/Sections/Taxation/Files/01%20-%20Proposed%20Guidance%20Why%20Mexican%20Retirement%20Funds%20%28Corona,%20Hernandez%29.PDF
There is some solace for most Mexicans who might have these accounts. Mexican banks holding these accounts do not usually send statements for these accounts outside of Mexico, so one must supply a Mexican address. Additionally, probably 99.9% of the accounts are held by Mexicans. So unless the Mexican banks start doing the UBS thing of asking people if they are resident in America, or have a green card, or are a US citizen even if they are a dual national, it will be unlikely that most banks will be able to identify Mexicans with AFORES and ties to the States. It also seems like it would be a waste for the IRS to expend energy looking for small retirement savings accounts to tax, especially when they are regulated by foreign government agencies, but Canadians with RESPs and other similar accounts as well as retirement savers in other countries know better.
I think we could all use a glimmer of hope right about now…
I sent a letter on November 11 to the Canadian Bankers Association, and today I got a response from none other than Ms. Drew-Lytle:
Her response was to this letter:
“Dear Sir or Madam:
From reading your entry into the Canadian Government’s Finance Committee’s Pre-2013 Budget Submissions, it is evident that the Canadian Bankers Association may seek to encourage the Canadian Government to enter into a Intergovernmental Agreement with the United States to implement Foreign Account Tax Compliance Act (FATCA).
http://www.parl.gc.ca/Content/HOC/Committee/411/FINA/WebDoc/WD5709773/411_FINA_PBC2012_Briefs/CanadianBankersAssociationE.pdf
I strongly feel that any IGA with the US on FATCA would be a grave mistake for the future of Canada.
You may be aware that the Department of Finance has recently posted a request for input from Canadians on this subject:
http://www.fin.gc.ca/treaties-conventions/notices/unitedstates-etatsunis-eng.asp
I implore the Canadian Banker’s Association to investigate a course of action other than to press our federal government to enter into an IGA, one that would be significantly less costly to your industry than FATCA compliance will be.
There is a growing consensus that in the absence of Intergovernmental Agreements, FATCA on its own would be unenforceable. James Jatras is a US attorney with Squire Sanders, a Washington DC public advocacy firm and an expert on FATCA who has developed a comprehensive plan to repeal it. He warns against countries entering into IGA’s with the United States:
“IGAs (intergovernmental agreements) are essential for the US to implement what would otherwise be an unenforceable regime. No one pretended that FATCA could be successfully enforced solely as a unlilateral and direct U.S. imposition. Either Washington will be successful in pressuring or tricking other countries into enforcing FATCA on themselves, or the whole scheme collapses.”
He further suggests:
• Governments (including Canada’s) must tell Washington in no uncertain terms they will not enter into any IGA on FATCA, nor will they allow extraterritorial penalization of their domestic firms, for which retaliatory steps will be imposed; and
• Industry (including Canadian firms and associations) need to divert a small fraction of the funds they have been expending on, in effect, making FATCA more minimally tolerable but achievable and instead put some relatively small investment into repeal.
I encourage you to talk to Mr. Jatras, if only to hear his plan to derail FATCA. I am a private Canadian/US citizen with no other connection to Mr. Jatras than a shared interest in keeping Canada from entering into FATCA with the USA. He can be reached at:
http://www.squiresanders.com/james_jatras/
Thank you for your consideration.
(name withheld)
Ms. Drew-Lytle’s response was:
Dear (name withheld),
Thank you for your e-mail. I encourage you to provide your views on the intergovernmental agreement to the federal government as part of their consultation with Canadians on this issue. We are aware of Mr. Jatras’ views and have considered them as we move forward on this issue. Please be assured that our primary concern in dealing with FATCA has always been, and continues to be, the impact that this extraterritorial legislation would have on Canadian bank customers.
There are more than 738,000 Mexicans, living in Mexico, who were born in the US and therefore are dual citizens. In addition, there are about 60,000 Americans living in Mexico who are not Mexican citizens. The impact of FATCA there will be comparable to that in Canada.
I’ve been thinking, maybe FATCA shows the limit of US jurisdiction after all. For example, if dual citizens in Mexico have bank accounts there, refuse to give information to establish that they are US persons, and are considered recalcitrant, all the US can do is withhold 30% of US income going to those accounts. The dual citizens most probably don’t have any US income, so can they just ignore the whole thing and tell the US to take a hike? And even if they have US income, shouldn’t the US tax it anyway? FATCA is a US law so it cannot make Mexico withhold US tax on Mexican income of these people and send it to the US, unless Mexico agrees to a treaty with that provision. Mexico might agree to do that for US residents, similar to the EU savings directive does, but I doubt it would subject its own citizens, living in Mexico, to this kind of treatment. In other words, in practice, US jurisdiction does end at the border.
It is interesting that the Mexico IGA hasn’t been released yet. Mexico seems to have the most to gain from a truly reciprocal agreement with the US. But until the actual document is released, it is hard to know what they got, and I can’t imagine the US will have given them everything they were looking for. All the other IGA’s seem to be released pretty soon after signing. What do you suppose is in this one that makes it different?
Another thing, which apparently no one else noticed. The FATCA “penalty” to force foreign banks to comply is a tax withholding of 30% on any US income sent to that bank (it does not apply to all bank transfers, only to payments of US income). That might sound like a penalty, but wait a minute, doesn’t the US tax this already? No, the US doesn’t tax interest or capital gains of nonresident foreigners at all. The US goes through all this trouble to tax foreign income of nonresident citizens but doesn’t assert its right to tax income generated right there. Is the US so afraid that it will lose foreign investment if it taxes it? For most foreign investors, it wouldn’t make any difference because they have to pay tax to their countries of residence anyway and could use US tax as a foreign tax credit. I imagine that, to the US, such tax would be several times higher than what FATCA would bring. I wonder why no one else mentions this.
There is also this other big headache for those deemed ‘US taxable persons’ living in Mexico, which is described below. The article is about a Private Letter Ruling, so it is not a reversal in general of yet another instance where the US IRS punishes US persons living abroad – even though – as in this case, they are following the laws of the country where they reside, and may have been born.
http://intltax.typepad.com/intltax_blog/form-3520/
November 15, 2012
I.R.S. Rules that Mexican Fideicomiso is Not a Trust
“Yesterday the I.R.S. released PLR 201245003,
which concluded that a Mexican fideicomiso (or Mexican Land Trust) was
not a trust for U.S. tax purposes. If a Mexican fideicomiso is not a
trust, then it is not a foreign trust and no Form 3520 or 3520-A would
need to be filed………………”
@Shadow Raider: what is scaring me about FATCA is the potential cruel and unusual punishment and extortion from the US from the people whose names will be transfered.
They potentially might be coerced into OVD type programs where they will be threatened with bankrupting fines for residents or else deportation for immigrants if they don’t pay up, and for non residents who are somewhat protected in the case of Canada by collections, the fear of being harrassed or arrested when crossing the border to come see family, the fear of their passports not being renewed, and the discrimination they’re facing with banks and investment firms. That’s the part that is bothering me, knowing that there is no reasonable option to fix the problem for the millions people affected.
Foreign governments are not aware of the “punishment”. IGAs should contain a penalty structure to ensure fair treatment of the people whose names are being transferred.
Who really think that the IRS is going to set a threshold for contacting the people they get the names. The net is going to be as wide as possible to generate as much revenue as possible.
What is also bothering me is the 30% withholding threats on entire institutions, not just “recalcitrant people”, and the discrimination against US persons that is going on abroad.
And the bad faith on the US on reciprocity.
It is just unbelievable and disgusting that this discrimination and suffering of normal expats are acceptable to get a minimal amount of revenue. That’s how desperate the US is.
BTW, I contacted the senator elect of the state I live in. I asked to meet to discuss the points I was raising in my initial correspondence, but right now, they forwarded it to their policy team who should be in touch. We’ll see if they want to meet or if I just get a thank you for your concern letter.
@ShadowRaider, re: “Is the US so afraid that it will lose foreign investment if it taxes it?”
Weren’t some of the US accounts offered to foreign non-residents deliberately non-interest bearing (below $10 per year?) so as to not be reportable? I thought I read that for Florida and Texas, accounts owned by foreign non-residents was an important source of funds the banks used to lend out, and that in some cases, non-resident accounts made up 40% or more of the accounts (or deposits?) they held. During the US banking crisis, that was important to their solvency, as it would be now too.
So foreign investments are important to the US in general, but if I understood what I read, the mere existence of pools of money deposited by foreign non-residents is very important for US bank’s access to ready liquid assets. And if the bank doesn’t have to offer any interest on large accounts, so much the better for them – to profit from the spread between the cost of lending and the cost of borrowing?
As this author says in his article ‘Financial Markets’ Ugly Reaction to the FATCA Factor’ (Monday, 14 May 2012 07:02 AM By Denis Kleinfeld)
……..”What do you think is going to happen to deposits or investments in U.S. financial institutions in Florida, Texas, Arizona, New Mexico, California and even New York when it becomes better known to depositors and investors that their previously confidential bank information is now to be sent to Mexico or Venezuela? Or Russia?…” http://www.moneynews.com/Kleinfeld/Financial-Markets-Reaction-FATCA/2012/05/14/id/438915
The US Treasury pretends that they are reluctant to offer automatic reciprocal reporting to all other countries on the basis of human rights concerns – while still asserting that it will be requiring it from everyone else to remit the info in full to the US – and that providing international access to ‘reliable’ US bank ‘financial privacy’ and ‘stability’ is merely their way of protecting individuals who would be in danger of kidnapping, extortion and persecution by their home governments elsewhere. In reality, they just want the best of both worlds – one rule for the US, one rule for everyone else. Offering and maintaining inducements for US banks to attract and hold as much capital (from whatever sources) as possible, while punishing all those deemed US taxable persons from holding entirely ordinary local, legal, post-tax registered savings in Canada – a country with the most extensive reciprocal tax agreement with the US – far beyond that held with any other nation. But yet, the US says that it will not make a specific country exception – even for Canada. Although the US states that under GATCA, it will give itself the right to make any exceptions it wants to the list of countries that it will automatically report to. And, reserve the right to determine what and how much information it will offer.
http://www.accountingtoday.com/news/Congress-Probes-IRS-FATCA-Interest-Regulations-62627-1.html?taxpro
http://blogs.reuters.com/financial-regulatory-forum/2012/01/26/foreign-account-tax-compliance-act-threatens-investment-in-the-u-s/
Thanks for sharing your correspondence to the Canadian Bankers Association, bubblebustin.
I will continue to provide addendums to my original comments to the Government regarding FATCA and IGAs.
Thank you for that brilliant move @bubblebustin.
Thank you Badger, Calgary411
I also wrote to three other organizations who referred to FATCA in their budget submissions.
She does little to tip her hand, but I am encouraged by her use of the word “extraterritorial”. My banker describes FATCA as “a mess”.