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.