Britain, France, Germany, Italy Spain: US citizens’ bank data in exchange for US reporting some of their citizens’ bank accounts
Overseas Americans already caught in crosshairs
GENEVA, SWITZERLAND – A proposed deal that is being hailed by the six countries involved as a step forward in their fight against international tax evasion ironically borrows from a Swiss solution proposed as part of new double taxation treaties. In both cases data on foreign citizens is not turned over directly to the other government by financial institutions. Instead, the banks would hand data on foreign clients to their own governments, which would pass it on.
The US and EU-5 proposal comes as Swiss and US negotiators grapple with differing interpretations of a pending a new tax treaty. Strict Swiss data protection laws have been a sticking point. The Swiss have insisted they will not accept “fishing expeditions” but will accept bulk requests where tax fraud or evasion is shown to be likely.
Switzerland proposed for its recently negotiated double taxation treaties with Germany and the UK that Swiss banks collect withholding taxes that the Swiss government will then pay to these countries. Their citizens can elect to declare the assets and get the withholding tax back or cede it to their governments if they do not want to declare their accounts.
The news of the six nation proposal came at the same time 8 February as the publication of 355 pages of regulations for Fatca, new US legislation designed to fight tax evasion.
EC applauds government to government approach
Europolitics reports that the European Commission was happy with the news.
“The European Commission issued a statement applauding these arrangements: ‘Thanks to this intergovernmental approach – the only one conceivable for now because it is rapid – to the exchange of tax information, the extra administrative costs, compliance costs and legal impediments (related to data protection) that financial institutions in the EU would have experienced will be considerably reduced’. The financial sector itself has estimated at US$100 million the extra costs for a multinational European bank as a result of implementation of the new legislation.
“For the Commission, which opened the debate on FATCA with Washington in April 2011, any EU member state should now be able to adopt this government-to-government approach to information exchange by concluding ‘coordinated bilateral agreements’ with the United States. Washington is considering developing other partnerships with third countries.”
Automatic data handover part of the likely new deal, but reciprocal
The new agreement between the US and Britain, France, Germany, Italy and Spain would see financial data for all Americans automatically handed by these countries to the IRS, the US tax arm.
In return, the US would hand over data, too, but, in addition, the other countries’ financial institutions would benefit from being included in a group registration with the IRS. The result: complying with Fatca would be far less expensive.
The US argues the new arrangement would lower the cost of implementing Fatca—and that it will at the same time bring the other governments information about bank accounts held in the US by some of their own citizens, those with offshore accounts.
Significantly, too, “the Fatca partner [country] would not be required to terminate the account of a recalcitrant account holder”, an American who did not report account information to the IRS, according to the US Treasury.
The reporting requirements and burdens would not be the same: the US is asking for all US accounts to be reported because it is the only country besides Eritrea to tax its citizens on the basis of citizenship rather than residence. The five European countries would be given data only on their citizens who have US accounts but who are resident in the home country.
Ed. note: Eritrea was condemned in 2009 and again in December 2011 by United Nations Security Council resolution 2023, for destabilizing the Horn of Africa region. Eritrea is sanctioned in part for its diaspora tax, used for military purposes. The US voted in favour of the sanctions. The only other country, according to Wikipedia, that has a citizenship-based tax system as opposed to residence system, was the Philippines, but it changed to a residence system in 1995.
Fatca: data privacy concerns circumvented by reporting to banks’ own governments
Fatca, the Foreign Account Tax Compliance Act, is a US law that went into effect in March 2010 but which is only gradually being implemented. It requires foreign financial institutions (FFI’s) to report to the US government US accounts, according to the US Treasury Department’s press release on the six-nation proposed agreement Wednesday 8 February.
Fatca’s implementation has been rescheduled several times and it has been the subject of much heated debate in the financial industry. The US Treasury Department in its press release concedes that Fatca “has raised a number of issues, including that FFIs established in these countries may not be able to comply with the reporting, withholding and account closure requirements because of legal restrictions.”
Data protection laws have been part of this debate in the UK, for example.
Questions have also been raised about the legitimacy of the American government writing laws that apply to non-US businesses, the FFIs, outside the US.
Fatca and Americans living outside the US: not tax evaders
US expatriates have voiced a number of concerns about Fatca, starting with its failure to distinguish between Americans in the US with offshore accounts and Americans who are resident, particularly long-term, overseas.
American Citizens Abroad (ACA), a Geneva-based international non-profit organization, in 2011 and after public debate in town hall meetings, called for the outright repeal of Fatca, saying it “destroys lives and the US economy”.
Growing number of Americans in Switzerland refused regular bank accounts
A Town Hall meeting of Americans in Geneva Wednesday 8 February called for a show of hands of those who have been turned down for a bank account in the past year: an estimated 50 percent said yes, and afterwards some people admitted privately they haven’t told their banks they are American for fear their accounts will be closed.
The US is currently investigating 11 Swiss banks for aiding wealthy Americans based in the US to evade taxes. More importantly, for Americans who live in Switzerland, Swiss banks, like those elsewhere, are preparing for Fatca, and US clients may be viewed as a liability.
ACA has been gathering growing evidence that US residents abroad, even if they file taxes, are being refused bank accounts and that financial institutions are beginning to divest themselves of US securities.
The New York Times in an article published 9 February says “Fatca has also been criticized by American expatriates because it imposes new reporting requirements. Some have said it makes Americans less attractive as clients for financial institutions, raising the cost of doing business overseas. Those criticisms were not addressed in the proposed rules.”
Tax evasion effort tacked onto jobs bill
Fatca was passed by the US Congress to little fanfare in 2010, tacked onto a much larger jobs bill called the Hire Act. President Barack Obama when he signed it, made reference to four of the five parts of the Hire Act, never mentioning the foreign tax compliance section. The IRS web page devoted to Hire initially failed to mention Fatca as well (Hire Act (pdf).
The US Treasury Department press release yesterday mentions that the five Fatca partners of the US would look at “certain accounts” as part of the agreement.
The law itself is more precise, stating that FFIs will be obliged “in the case of any United States account maintained by such institution, to report on an annual basis” several pieces of information:
“(A) The name, address, and TIN of each account holder
which is a specified United States person and, in the case of any account holder which is a United States owned foreign entity, the name, address, and TIN of each substantial United States owner of such entity.
(B) The account number.
(C) The account balance or value (determined at such time and in such manner as the Secretary may provide).
(D) Except to the extent provided by the Secretary, the gross receipts and gross withdrawals or payments from the account (determined for such period and in such manner as the Secretary may provide).”
It defines a US account: “In general.—The term ‘United States account’ means any financial account which is held by one or more
specified United States persons or United States owned foreign entities.” The exception is an individual whose aggregate accounts at one financial institution, including for example retirement accounts, are under CHF50,000 in a given year.