Myth vs. FATCA: The Truth About Treasury’s Effort To Combat Offshore Tax Evasion
The Foreign Account Tax Compliance Act (FATCA) is rapidly becoming the global standard in the effort to curtail offshore tax evasion. This month’s G-20 communique marked another important milestone; highlighting the importance of global tax transparency and a renewed commitment to work towards an international standard for the exchange of tax information.
For years, there has been concern about the so-called “tax gap” – the difference between the tax dollars that are owed under the law, and those that are actually collected. Offshore tax evasion is a significant contributor to the tax gap. FATCA establishes a process for foreign financial institutions (FFIs) to report information about U.S. account holders to the IRS.
Treasury developed intergovernmental agreements (IGAs) to implement FATCA effectively. These IGAs will require all of the relevant FFIs in a jurisdiction to report information about offshore U.S. accounts – a reporting obligation that will help the IRS catch tax evaders. Yet despite the clear, positive benefits of FATCA, many continue to make misleading claims about its implementation and impact. Here are the facts on FATCA:
Myth No. 1: Some claim it’s overly costly and burdensome due to complex regulations and difficult to meet reporting requirements.
FACT: Treasury and the IRS have designed our regulations in a way that minimizes administrative burdens and related costs. Specifically, the regulations were intentionally designed to appropriately balance the scope of entities and accounts subject to FATCA with due diligence requirements, while also phasing in the related obligations over several years. For example, the final regulations exempt all preexisting accounts held by individuals with $50,000 or less from review. For similar accounts with less than $1,000,000, an FFI is only required to search the account information that is electronically available. In many cases, FFIs are permitted to rely on information that they already must collect for local anti-money laundering and know-your-customer rules.
Many of these cost-saving simplifications were the result of comments received from affected financial institutions and foreign governments, which helped us to tailor the rules to achieve the policy objectives of the statute without imposing undue burdens or costs.
Myth No. 2: Some claim that U.S. citizens living overseas will become outcasts in the international financial world.
FACT: FATCA withholding applies to the U.S. investments of FFIs whether or not they have U.S. account holders, so turning away known U.S. account holders will not enable an FFI to avoid FATCA. We expect that many, if not most, of the governments implementing FATCA through IGAs will require their financial institutions to identify and report on all non-resident account holders, not just U.S. account holders.
Those governments agree with FATCA’s policy objectives, and want to facilitate the collection of information about the offshore accounts of their own residents. For example, 19 countries have already announced a pilot project to exchange account information about each other’s residents that will be collected by the governments in line with FATCA’s due diligence and reporting procedures. FATCA is quickly becoming the global standard for automatic information exchange and we expect the number of jurisdictions that choose to implement the same reporting procedures for all offshore accounts to continue to grow.
Myth No. 3: Some claim that Americans living abroad will give up their U.S. citizenship because of liabilities and burdens created by FATCA.
FACT: FATCA provisions impose no new obligations on U.S. citizens living abroad. Instead, FATCA’s withholding obligations fall on institutions making payments to FFIs, and the due diligence and reporting requirements fall on the FFIs themselves.
U.S. taxpayers, including U.S. citizens living abroad, are required to comply with U.S. tax laws. Individuals that have used offshore accounts to evade tax obligations may rightly fear that FATCA will identify their illicit activities. Yet a decision to renounce U.S. citizenship would not relieve these individuals of prior U.S. tax obligations, and might well create additional U.S. tax obligations for certain citizens and long-term residents who give up citizenship or residency.
Myth No. 4: Some claim that countries are opposed to FATCA, in part because the legislation could force foreign banks to violate laws in their own countries.
FACT: Treasury’s decision to implement FATCA through IGAs that are respectful of the individual laws and customs of partner jurisdictions has contributed to the significant international interest in participating in FATCA compliance efforts. The two FATCA model IGAs incorporate a two-pronged approach: under the first model, FFIs report to their respective governments who then relay that information to the IRS; or, under the second model, they report directly to the IRS to the extent the account holder consents or such reporting is otherwise legally permitted, supplemented by government-to-government cooperation to facilitate reporting on non-consenting accounts. These model IGAs offer alternative frameworks for information sharing that abides by local laws.
The success of this approach is evidenced by the international response to this legislation. To date, Treasury has signed 9 IGAs and has reached 15 agreements in substance, including with Malta, Bermuda, and the Cayman Islands. We are also engaged with over 70 additional countries and expect to conclude negotiations with several others soon.
In September 2013, G-20 leaders committed to the automatic exchange of information as the new global standard, and endorsed the development of a single model for this exchange, which is expected to be based on the FATCA IGAs.
Myth No. 5: Some claim that FATCA will generate a backlash from foreign governments who view this as an overreach of U.S. law.
FACT: FATCA has received considerable international support because most foreign governments recognize how effective FATCA, and in particular our intergovernmental approach, will be in detecting and combatting tax evaders. G-8 leaders recently acknowledged the central role of tax information exchange, stating in their June 2013 communiqué: “A critical tool in the fight against tax evasion is the exchange of information between jurisdictions,” and urging that “[t]ax authorities across the world should automatically share information to fight the scourge of tax evasion.”
Myth No. 6: Some claim that FATCA will unfairly expose FFIs to heavy penalties before they have the necessary mechanisms in place to comply.
FACT: We recently announced a six-month extension to our withholding and account due diligence requirements because we recognize that FFIs need sufficient time to register for, understand, and implement their due diligence and reporting processes. Those requirements will now start on July 1, 2014. This extension exemplifies our commitment to ensuring that foreign jurisdictions and FFIs have sufficient time to properly prepare so that the law can be implemented effectively.
Myth No. 7: Some claim that FATCA aims to use foreign banks as an extension of the IRS.
FACT: Individuals making this claim have confused reporting responsibilities with actual enforcement. The objective of FATCA is the reporting of foreign financial accounts held by U.S. persons or certain entities with U.S. owners. This law only requires FFIs to share information about financial accounts held by U.S. taxpayers, similar to what is already required of U.S. financial institutions; it does not include an enforcement component for those FFIs.
Sosostris is Julie’s editor. Julie emailed me after I commented on her blog piece and asked where I’d seen it. Of course I sent her here. I’ve also invited her to participate if she’d like to. I think she should be elevated to Brock Hall of Fame when the article comes out in the LA Daily Journal.
Well, what can I say. I’m honored that my story will be in the news again. Maybe some old friends who live in the area will read it too!
@Bubblebustin: Thanks for posting the Denis Kleinfeld article “FATCA – Predictions of Implementation Failure Proving True”. Among other points, he devotes a considerable section to data security issues and the inevitability of data leaks and theft. This topic is overlooked in most articles on FATCA from the mainstream press. Perhaps it needs to be emphasized to journalists reporting on FATCA.
@USXCanada: I appreciate the “guerrilla” award but must mention it was my intention to predict how long Bob Stack would be in his position rather than to unearth dirt on him. However, if issues involving moral turpitude had been uncovered, I would have likely brought these issues to the forum for discussion.
In the category of interesting items noted during my research, here are two:
1) Ivins, Phillips & Barker: Most professional services firms, such as law, accounting and other consulting firms, are shaped like pyramids with few partners at the top and many associates in the lower ranks – this is the way partners make lots of money. I,P&B, however, is the opposite with 20 partners and eight associates. I wonder if this is intentional or if it is a firm in financial trouble. It would be worthwhile to know its personnel structure before the 2008 recession and whether they subsequently fired many associates. Was Robert Stack pushed out the door to reduce its top-heavy structure or was he asked to go to Treasury with the intention of returning to become a rainmaker for the firm?
2) Education: After graduating from a Catholic high school in New York city in 1972, Robert Stack studied English, French and Education at the State University of NY-Albany, graduating in 1976. He next obtained an MA in French from the private New York University. Then he earned an MSFS in International Relations at the private Georgetown University and finally earned a JD at Georgetown. It appears that he was studying at these three universities from the age of 18 to 30. Although not necessarily relevant to the FATCA discussion, how did he afford this?
@Johnson: I agree with your statement that Stack is doing a bad job. At least three times he has offered exaggerations in public statements undermining his creditability and he has only been in the job six months:
1) During his teleconference to the EU Parliament when he promised reciprocity from the US;
2) His statement regarding the «groundswell of international interest in FATCA»;
3) His propagandistic blog article „Myth vs. FATCA»
He has annoyed Americans abroad with these exaggerations and, I am of the opinion, he should be “allowed to resign” from his post before sticking his foot in his mouth yet again and upsetting even more US citizens abroad. On the other hand, I expect that he will leave his government position to return to a more lucrative position in private practice in a year so he will be gone soon (although not soon enough).
@Just Me, Calgary411
Good thing. It looks like it’s a trade paper for lawyers and have to a subscriber to get it. I can email her in a few days to see what the general response among other lawyers was like.
Thanks for that info bubblebustin.
When you email, can you ask if we can post it here at Isaac Brock. Thanks.
Will do, Calgary411.
Thanks — such good writing and she’s right on the mark. She could post it here too — or someone on her behalf.
She seems like a great person and open to discussion too.
@bubblebustin, so glad that more US homeland media and residents are publishing and recognizing the FATCA problem. That may not be enough, but it is something.
Every day I meet more and more Canadians with family that studies, works or lives temporarily in the US, or has a US connection. There are so many that I think the Canadian government and the US do not realize the size of the opposition if and when an IGA was signed here. There are so many in the US temporarily, or even as permanent residents who do not understand about FBARs, and what it means even to be named as an executor or POA on Canadian accounts if you have that US relationship. Many think of it as temporary. No-one is thinking of their Canadian family accounts as ‘foreign’. FATCA just piles on top of this stupidity. Instead of being concerned with US residents with obvious deliberately designed ‘offshore’ trusts like the Pritzker family http://www.bloomberg.com/news/2013-05-21/pritzker-s-54-million-family-trust-fee-seen-as-unique.html or Jack Lew http://billmoyers.com/2013/03/08/jack-lew-citigroup-and-the-ugland-truth/ – but instead they are obsessed with the ordinary life events and accounts of the masses – and their ordinary (mostly post-tax) savings.
The rules for wealthy and connected US homelanders – including Obama appointees:
So, it’s okay with Treasury, IRS, Obama and US politicians for those with influence to have Ugland House Cayman trusts, but not okay for an ordinary Canadian to have a local legal chequing account that holds their pre-taxed measly wages.
Just one more symptom of the dysfunction-corruption that is the United States Government.
Dear President Obama and US Treasury:
“Yes, thanks, I’d like the Pritzker, Lew, and Geithner treatment”
For the record, the two top people in the US Treasury Tax Policy office, International Tax Counsel were former partners at Ivins, Phillips & Barker. Ms. Rolfes went across in 2011 and Mr. Stack in 2013:
Robert Stack, Deputy Assistant Secretary (International Tax Affairs), is the reporting authority for the Office of the International Tax Counsel, provides advice and counsel to the Assistant Secretary related to international tax policy and tax treaties, and officially represents the Administration’s interests in international settings.
Danielle Rolfes, International Tax Counsel, provides executive direction for the attorneys who provide legal advice and analysis relating to international tax issues, including legislation, regulations, and treaties, and official representation of the Administration’s policy in international settings.
Robert Stack reports to:
Mark J. Mazur, Assistant Secretary (Tax Policy), directs the Office of Tax Policy in developing, recommending, and implementing Federal tax policy on behalf of the Department. The Immediate Office includes five deputies, and several senior advisors and special assistants.
Mark J. Mazur reports to Jack Lew, Treasury Secretary.
Complaints about Mr. Stack’s non-factual statements should likely be addressed to Mark J. Mazur.
ACA didn’t cc Mr Mazur in their myth-busting letter to Mr Stack:
Prior to Mr Stack taking the Deputy Assistant Treasury Secretary position, the ACA sent a letter on FATCA to Mark J. Mazur, with copy to Danielle Rolfes:
Mark J. Mazur’s address is below to send complaints regarding Mr Stack’s behavior:
The Honorable Mark J. Mazur
Assistant Secretary (Tax Policy)
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220
I have been advised that what we don’t see is that the letter was emailed to Jack Lew, Mark Mazur, Danielle Rolfe, and Brett York. It was not sent as a hard copy, but only emailed because ACA has their direct email addresses.
@Just Me, thank you. I should have known they’d be all over it!
Julie Kessler’s article that badger posted yesterday should be showing up again soon. From Julie:
“My article originally entitled Passports, diplomacy and taxes which appeared on my site very briefly Wednesday night was quickly picked up for publication by the Los Angeles Daily Journal and retitled Expats’ tax dilemma. It appears in print on page 7 of their Friday, October 18, 2013 edition and on-line for LADJ subscribers. A reprint of the article will appear on this site shortly.”
Pingback: The Isaac Brock Society
Julie Kessler’s article “Passports, diplomacy and taxes” hasn’t reappeared on her blog. Have you heard anything from her?
@Em, it was printed in the paper which requires a subscription. As such, she is probably not allowed to post it.
@Em and Swisspinoy
She and I have been chitchatting via email. She had to purchase the right to reprint it after letting the Journal print it for free! It should appear soon. I said I’d try to get it it’s own post on Brock (perhaps Hall of Fame?) when it does.
Of interest in terms of the FATCA myths – that the US really really just wants to help the world reduce tax evasion EVERYWHERE and that FATCA is a way of doing this – including the US itself? http://federaltaxcrimes.blogspot.ca/2013/10/has-us-aided-international-tax-evasion.html
” “What Goes Around Comes Around: How the US Aided World Tax Evasion and What It Can Do About It”
Professor Reuven S. Avi-Yonah
Irwin I. Cohn Professor of Law, University of Michigan Law School”
Would be great if we could get a transcript.
US ‘reciprocity’ is one of the true MYTHs about FATCA. Funny though, it is not on the Treasury list!
The US has no intention of full and automatic reciprocity. Nor does it have authority to promise it.
…”Christians is adamant that “there is not now and there never will be” reciprocal information exchange. “In no way is the US in a sole executive agreement with no Congressional approval going to bind Congress to enact legislation that would see the US provide the same level of information to other countries”
“The IGA itself is not reciprocal, it is only aspirational, she noted. For instance it states: “The [Government of the] United States acknowledges the need to achieve equivalent levels of reciprocal automatic information exchange with [FATCA Partner]. The [Government of the] United States is committed to further improve transparency and enhance the exchange relationship with [FATCA Partner] by pursuing the adoption of regulations and advocating and supporting relevant legislation to achieve such equivalent levels of reciprocal automatic exchange.”
Words like “committed”, “enhance”, “advocate” and “pursuing the adoption” rather than “adopting” indicate that reciprocity “is never going to happen”, said Christians. “Any time the US says it is committed it means that it is not going to take place.” …” from http://www.compasscayman.com/journal/2013/02/06/Taxes-FATCA-%E2%80%93-symbol-of-the-mercenary-tax-state/
What You Give and What You Get: Reciprocity Under a Model 1 Intergovernmental Agreement on FATCA
McGill University – Faculty of Law
April 12, 2013
Cayman Fin. Rev. April 2013
and these blog entries;
I <3 Allison Christians.
Treasury’s reciprocity clause is nothing more than weasel words. Wake up, world!