Monday, September 24, 2012

FACTA II: Intergovernmental Agreements Take FATCA Partners One Step Closer To A Virtual International Banking Data Base


Even before the ink dries on the few agreements foreign banks may have entered into with the IRS to be a withholding agent for the US government, the rules are changing drastically. Major western European countries have already entered into agreements with the United States which would allow their respective banks to avoid the IRS completely and simply provide their respective governments with the names, account balances and other details of suspected Americans for the IRS to go after.

Most of these IGA’s have reciprocal provisions with "automatic exchange" of information provisions which will bring the computerized world even closer to the FATCA goal of developing a virtual international banking data base. Privacy concerns? No problem! Any country which is even thinking about signing up will be given a reasonable amount of time to change their laws and even their constitutions if need be, to come up with a disclosure protocol which meets the IRS checklist for "U.S. indicia" (read: suspected Americans). See our blog post of August 27, 2012 where we discussed the meaning of "U.S. indicia".

In a shocker to some, the new proposed rules for IGA’s even scrap the FATCA Proposed Regulations requirement that foreign banks submit their Know Your Customer and Anti-Money Laundering rules to IRS review and scrutiny before they are allowed the privilege of becoming a US withholding agent. Under the new rules, some qualifying foreign banks’ customers will be allowed to "self-certify" that they are not Americans! (Seriously??)

I will be speaking about these controversial proposed Intergovernmental agreements at an international FATCA conference in Miami in January of 2013. Stay tuned for more details.



7 comments:

  1. You write:

    "Privacy concerns? No problem! Any country which is even thinking about signing up will be given a reasonable amount of time to change their laws and even their constitutions if need be, to come up with a disclosure protocol which meets the IRS checklist for "U.S. indicia" (read: suspected Americans). See our blog post of August 27, 2012 where we discussed the meaning of "U.S. indicia"."

    So you think it is reasonable for the US and the IRS to impose its will on other sovereign nations so that they will expose (to use your words) "details of suspected Americans for the IRS to go after".

    Please do tell. Please explain why other countries should amend their laws and constitutions to expose people (many of which are dual citizens) "for the IRS to go after."

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  2. Hi Anonymous! thanks for writing again. I never said it was reasonable for the US to demand that other countries change their laws to accommodate the IRS. In fact it's pretty cheeky. I am simply reporting to you how FATCA is emerging as a body of law, even before it takes effect. I am simply trying to be realistic and "tell it like it is." Also, who said that governments have to be reasonable in their dealings with other governments? Doesn't history teach us that governments try to get away with as much as they can with other governments? It's all about self-interest. Being reasonable, nice, or fair has nothing to do with it.

    Why do you think so many countries are lining up to sign intergovernmental agreements with the United States? The reason is, it is in their perceived best interests to do do so. Despite the wishful thinking of some, FATCA is the future and it is here to stay. The bureaucrats in the German, British, and French "IRS" want to see what we have on their citizens as much as our IRS wants to see what foreign banks have on ours. But most importantly, the foreign banks already know how to deal with their own taxing authorities. Their perception is, it is far easier for them to simply dump their files on their American depositors on their own governments than it would be to have to get in bed with the IRS by agreeing to be a withholding agent of the US government. Given the choice, a Swiss, French, or English banker would rather deal with his own government than have to negotiate a contract with the IRS. Why not enter into "an automatic reciprocal exchange agreement" between governments?
    The bureaucrats on the other side of the Atlantic are as smart as the IRS. They know what they want and where the digital world is headed. An "automatic reciprocal exchange agreement" is simply another way of saying "virtual international banking data base." I don't like it any more than you do but I cannot wish it away or pretend that it's not going to happen; nor can I be an effective advocate for my clients if I don't learn about it and fully understand what FATCA is all about.

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    1. Hi Steve,

      You wrote:
      "Why do you think so many countries are lining up to sign intergovernmental agreements with the United States? The reason is, it is in their perceived best interests to do do so."

      Is it in their best interest because they "want to see what we have on their citizens as much as our IRS wants to see what foreign banks have on ours."
      Or is it in their best interest because the 30% withholding will do so much harm to their banking industry that it is best for them to comply?
      It would be interesting to see what the response would be without the 30% withholding rule in place, if there really was no coercion to do it.

      Only the first couple percents of the population of any country is rich enough to go through the hasle of opening bank account abroad and investing abroad. The rest of the population who have "offshore" banking are the million of immigrants who did not close their bank accounts in their country of origin. How about starting to reform our own tax system, before enacting this FATCA monster. It does not seem that the financial benefit will outweight by much the cost of implementation. Also, some IGAs require reciprocity, but congress has voted that down.

      http://articles.orlandosentinel.com/2012-07-26/news/os-congress-bank-vote-20120726_1_irs-rule-offshore-tax-evasion-foreign-deposits

      Not sure what happened to that bill in the Senate. But basically, congress is saying "it's too expensive for us to implement, and it will hurt our economy, but we don't care about yours. Send us the data, so we can start increasing our tax revenue."
      That's being hypocrit and arrogant. How can foreign governments agree to a one way deal?

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    2. "It would be interesting to see what the response would be without the 30% withholding rule in place, if there really was no coercion to do it."

      Indeed. The operative phrase here is "gunboat diplomacy".

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  3. U.S. Citizen Abroad asked me a question via Twitter but my response would not fit in the characters allowed. The question was, "What happens if only some countries sign these IGAs?". My response is as follows:

    For those countries which do not enter into intergovernmental agreements, the Proposed FATCA Regulations govern and each bank within that country's jurisdiction is supposed to enter into an FFI contract with the IRS. Those banks which fail to do so will be deemed non compliant and any transactions involving those banks and US source income will be subject to 30% withholding.

    Sure does sounds "unachievable" but that is what the law currently provides.

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  4. Hi Steve, You wrote,

    "Any country which is even thinking about signing up will be given a reasonable amount of time to change their laws and even their constitutions" and "Why do you think so many countries are lining up to sign intergovernmental agreements with the United States? The reason is, it is in their perceived best interests to do so."

    Agreed. But governments also have a big interest (probably their main interest) in retaining power in Parliament. National sovereignty has historically been an important matter to Canadian governments and its electorate, particularly in regards to the neighbouring United States. To amend privacy or human rights legislation (core values issues) in order to conform to the US Congress would likely be political suicide for the party in power. It’d be a hard one to spin.

    Discrimination based on national origin is forbidden by s. 15 of the Canadian Charter of Rights and Freedoms. If the federal government (currently Conservative) were to override this by invoking s. 33, the Charter’s “notwithstanding clause” – for the first time in history – in order to acquiesce to the wishes of the US government! – the opposition party (NDP) would have a field day! Probably the Conservatives would be handing them the next election.

    Not to say it can’t happen in Canada, but particularly in Canada electoral politics would be a strong deterrent and I suspect it’s in the decision-making mix.

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  5. The EU countries have a big interest in trying to something anything to shutdown "Swiss Banks." Remember, on a percentage basis there are far far higher amounts of Italian wealth hidden in Swtizerland than ever existed of American clients even in the bad old days. Some of this I happen to think is in fact simply poor tax administration by many European countries that has simply been allowing massive amounts of cash to be "skimmed" out of their countries right through the front door. So in a certain medium to long term perspective keeping FATCA alive is in their interest as up to now it appears to be the only thing that has had any sucess in breaking the Swiss.

    What I would argue in Canada is even if the "career" bureracrats wanted to help the US on FATCA it is probably no longer in their power to do so. The second thing is their doesn't appear to be a lot of high level communication between the governments on this issue. For example it appears that neither Minister of Revenue in Canada, Commissioner of CRA, or Deputy Commissioner of CRA have made official visits to Washington ever in the course of holding their positions. The main person who seems to be the Cdn Govt's contact with the US is Assistant Commissioner for Compliance Programs. All of my experience dealing with the CDN govt is that someone in the position of Assistant Commissioner(typically CRA Assistant Commisioner are regional officials i.e. Assistant Commissioner for Ontario, Assistant Commissioner for Quebec etc however they are a few that work out of Ottawa on special programs) is not going to be allowed to negotiate and sign an agreement all on their own. Typically most big agreements between Canada and the US no matter what the subject go through Langevin Block(the Canadian equivilent of the White House and office of the President). When the US and Canada sign an agreement on water quality in the Great Lake its has to go through Langevin at some point. That is just the way it works and the way it always has worked.

    I will also note the recently signed agreement with the UK has an MFN clause which says if the US gives better terms to any other country then the UK will be entitled to those same terms.

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