Monday, January 28, 2013

Living With FATCA Uncertainty: What Should A Foreign Financial Institution Do Until A Bilateral Agreement Is Signed?

I will be chairing an international conference in Miami this week on FATCA compliance. Here is an advance read on some of the issues I plan to discuss with the people who will be coming from all over the Caribbean and Latin America.

With the publication of the Final FATCA Regulations last week, we learn the next big FATCA timeline date is July 15, 2013—the date the IRS is opening its aptly called FATCA Registration Portal—the door to the Byzantine world of compliance with the myriad duties of an IRS withholding agent. This summer starts the long awaited beginning of the creation of a virtual international banking data base by which the names and account details of American depositors in foreign banks and financial institutions are automatically updated and reported to the IRS. If things work out the way the IRS counterparts in each FATCA-friendly jurisdiction hopes, that data base will also include the names and detailed account information for people who may be avoiding taxes in their own homelands once the home countries sign a FATCA bilateral agreement with the US Department of Treasury.

For the client, the foreign financial institution whose managers are wondering what to do about FATCA, the stakes are huge. With the publication of the Final Regulations and the policy statements in the preliminary texts, it is now overwhelmingly obvious that the best interests of every government whose people do business with Americans, is to save them and their financial institutions from having to maintain an "up close and personal" relationship with the hulking IRS.

In most cases, once the bilateral agreements take effect, individual FFI agreements will become superfluous as foreign banks cough up the names of their Americans to the IRS through their respective governments and existing Competent Authority offices.

Yet despite the recent Treasury announcement that 50 countries want to talk to the US about a bilateral agreement, the Treasury website which was updated last week, only shows three countries who have signed so far (Denmark, the U.K. and Mexico) and six others who have agreed to FATCA–friendly press releases.

If every foreign financial institution abroad with American customers were to sign up on July 15 for their fair share of FATCA abuse, the IRS FATCA Portal computers would pop their fuses. Even the IRS realizes it would be a daunting challenge to manage an ongoing reporting relationship with every bank in the world and that it would be a lot easier if the IRS could collect the data it wants on Americans from one source in each country as opposed to thousands of banks all over the world.

But the reality is, for most countries, this is unlikely to happen in time for the FATCA effective dates. Once they kick in, the IRS will have no choice but follow the law and start demanding a 30% haircut from all US source income flowing out of the United States, until each country signs up. Until they do, both the impending FATCA effective dates and the inaction or delays of foreign governments are in effect, leaving foreign financial institutions no choice but to enter the Portal to Mordor.

Bank and financial managers all over the world are now in a very tough spot. What to do by July 15 if their governments have yet to sign on to FATCA?

One could easily argue that whatever you think of FATCA or your position on the debate over US overreaching, if you have American clients and plan to do business with Americans in the future, the smart business decision is to enter the menacing Portal this summer.

Here’s why:
1. Simply registering as an FFI now does not irrevocably commit an institution to the full rigors of the Regulations. It is better to establish a pattern of cooperation with the IRS from the beginning. The rules on FFI withholding are likely to change in some ways, a dozen times between now and full implementation. Signing up in July is only the beginning. It is a long way off before there will be any withholding despite the well expressed intentions of the Final Regulations.
2. Each country’s FATCA dynamic is changing almost daily. It could be argued that a good defensive position is to start the registration process, if bilateral goals fall through. The name of the game is to take measures to mitigate FATCA uncertainty as we speed toward the FATCA implementation dates. The chances of a repeal of FATCA right now are next to nothing. Every modern financial institution in the world has a present duty to its shareholders and stakeholders to find out what FATCA compliance demands.
3. If there is uncertainty in a country about whether there is going to be a bilateral deal, or whether the deal can be made on time, it would not be hard to imagine that disgruntled shareholders of foreign financial institutions might bring legal action against current bank managers who sat on their hands while their government’s bilateral deal fell through and the IRS started withholding. One could easily envision a shareholder suit claiming damages in the amount of the 30% profits the IRS was taking from funds foreign financial institution shareholders thought was coming to them.
The great irony over the FATCA menace is while everyone is worrying about the details of withholding on pass thru payments and whether an individual company might somehow be considered "deemed compliant," the U.S. Treasury has pulled off something like a "bait and switch" public relations coup! Consider what has happened in the last 12 months: on the very same day the IRS announced Proposed Regulations previewing some of the most invasive, horrendous, and burdensome provisions of the Internal Revenue Code, (February 8, 2012) it also announced with great fanfare, a pledge of cooperation from the G-5 who are eager to get a piece of the action. In effect the US is saying to the world, "here is a preview of how miserable we are going to make your lives once FATCA kicks in. Want to avoid this pain? Just get your governments moving on a bilateral agreement and we will leave you alone."
The IRS is as frightened of FATCA as we are. Top level IRS managers and worker bees are sweating out twelve to fifteen hour days, seven days a week trying to figure out how they are going to administer this thing.

For the foreign financial institutions the stakes are far too high to wait for an elected government or their own IRS bureaucracies to come to the rescue. In the Darwinian world of international finance, the survivors are going to be measured by their foresight, initiative and action well in advance of the coming new regime.


  1. This disaster will simply collapse under its own weight. It can be neither administered nor enforced. It is the worst piece of legislation to come out of Congress in the last century and everyone knows it.

    1. Yes, but the short term damage to some institutions and some individuals may be very destructive.

      If we got the word out to more people, outrage might cause more pushback. If a number of institutions and governments tell Mr. FATCA to stuff it then how can the US government go after all of them at once if the IRS itself is scrambling to figure out how to do all of the bureaucracy to implement this stupid law.

  2. Interesting now that the final FATCA regs are out, and that only a few IGAs are signed. Switzerland announced in December that their IGA was drafted, but the text is being kept secret. We are told it is a Model II IGA. A review of the schedule of the Swiss Parliament for the March session shows that the matter has not been scheduled. Confidential sources in Bern tell me that the finance parliamentary comission does not even have access to the text of the IGA. This is astounding, especially given that FATCA so violates the protections of the Swiss Constitution that it would require a Mandatory Referendum including the neccesary constitutional amendments. What is going on here, is this going to be put to parliament at the last minute so nobody reads it, just as is done with many bills in Washington?

    1. How come the finance parliamentary commission does not have access to the text of the IGA? This is crazy!
      Is a referendum mandatory for an issue like that? Given what the US has done to the Swiss banking system, one can only think that a majority of people would be against it.
      Can the Swiss government sign the IGA without a referendum?
      Your lawmakers should be made aware of it and watch for it!

    2. I think that since the IGA and FATCA would violate various constitutional protections, the mandatory referendum is needed. To come to this conclusion you have to read Art 140, 141, 141a together and read between the lines:

      Art. 140 Mandatory referendum
      1 The following must be put to the vote of the People and the Cantons:
      a. amendments to the Federal Constitution;
      b. accession to organisations for collective security or to supranational communities;
      c. emergency federal acts that are not based on a provision of the Constitution
      and whose term of validity exceeds one year; such federal acts must be put
      to the vote within one year of being passed by the Federal Assembly.
      2 The following shall be submitted to a vote of the People:
      a. popular initiatives for a complete revision of the Federal Constitution;
      abis. …80
      b.81 popular initiatives for a partial revision of the Federal Constitution in the
      form of a general proposal that have been rejected by the Federal Assembly;
      c. the question of whether a complete revision of the Federal Constitution
      should be carried out, in the event that there is disagreement between the two
      Art. 141 Optional referendum
      1 If within 100 days of the official publication of the enactment any 50,000 persons
      eligible to vote or any eight Cantons request it, the following shall be submitted to a
      vote of the People:82
      a. federal acts;
      b. emergency federal acts whose term of validity exceeds one year;
      c. federal decrees, provided the Constitution or an act so requires;
      d. international treaties that:
      1. are of unlimited duration and may not be terminated;
      2. provide for accession to an international organisation;
      3.83 contain important legislative provisions or whose implementation requires
      the enactment of federal legislation.
      Art. 141a 85 Implementation of international treaties
      1 If the decision on ratification of an international treaty is subject to a mandatory
      referendum, the Federal Assembly may incorporate in the decision on ratification the
      amendments to the Constitution that provide for the implementation of the treaty.
      2 If the decision on ratification of an international treaty is subject to an optional
      referendum, the Federal Assembly may incorporate in the decision on ratification the
      amendments to the law that provide for the implementation of the treaty.

    3. Here is a direct link to a comment I made at IBS in the discussion about a Jim Jatras article against FATCA:

      In my comment, I go into more detail on the Swiss Constitution and the issue of optional vs. mandatory referendum.

  3. "But the reality is, for most countries, this is unlikely to happen in time for the FATCA effective dates. Once they kick in, the IRS will have no choice but follow the law and start demanding a 30% haircut from all US source income flowing out of the United States, until each country signs up."

    Let them try them and get sued in international court.

  4. Mr Mopsick, can you explain us what the IRS/Treasury will get with FATCA that they're not getting with John Doe summons?
    A judge just approved one to go after UBS again.

    Summons like that every big bank in know tax heavens and you'll get the same result, without the cost and collateral dammage that FATCA is bringing. Why aren't they realizing that??

    1. The John Doe Summons process is costly, ineffective and very, very time consuming. Why would the government agree to do all the work on this when it can have a statute which places all the burden on the taxpaying public to report the information in the first place?

  5. Swiss banks and others around the world are simply refusing to serve Americans living in their country.

    This article tells of an American creating niche markets, promoting US interests around the world, helping reduce US trade deficit and creating employment for Americans in US. But, he's packing it in and moving to Vermont to farm.

    Why? Because he can no longer have a bank account in Switzerland, where he lives with hs Swiss wife.

    Does this make any sense? Oh wait, those intelligent, highly educated, moral folks in Washington you have told us about don't have any common sense.

    1. @Blaze The Olenick example is not unlike that of our friend Roger Conklin who had to pack up and leave Brazil because of US double taxation and Brazilian laws against exchanging money to pay foreign taxes.

      Here is the IBS discussion thread on the GenevaLunch article on Olenick:

    2. I forgot to mention that the Olenick case, like Roger's experience results in negative effects on US exports. Roger had to close a business unit of a US company related to telecoms I believe it was, and a foreign company got the business.

    3. @Steven BTW I don't know if you saw the Time article that just came out:

  6. FATCA may not even be legal. It really looks as if the IRS and Treasury are pulling a fast one, entering into international agreements in lieu of being made by duly elected representatives, and bypassing existing treaties. And that is in addition to the slick and sly 'savings clause' and 'last in time' rule. Does that look like good faith actions or honest?

    Really gives you something to be proud of.
    01/21/2013 10:33:00 AM EST

    'Why FATCA Is A Tax Treaty Override' by
    Allison Christians

    "........this regime constitutes a tax treaty override, and that I don't think that IGAs are a valid fix as a matter of law. Here is my reasoning. I will use the US-Canada tax treaty as an example, but the override applies to all US tax treaties currently in force........

  7. @Anonymous: Of couse,, we also know Foreign Attack To Control All also violates laws and constitutions of countries where we have built our lives, earned our incomes and saved and invested our assets.

    United States of Arrogance does not care. Their laws rule supreme worldwide (even when their own is in doubt at home).

  8. Better idea: FFIs need to get their money out of the US NOW. Capital flight because US government stupidity.

    1. I certainly pulled all of my investments out of US as soon as I heard about FATCA. I know others who have done the same.

      Was that the intent of Congress and IRS?

    2. to make sure that tax lawyers like Mopsick stay in

  9. What does this really mean for the image of the US abroad? Look here!

  10. FATCA intergovernmental agreements exposed as bad deal for partner countries

    This is going to be a big mess. It will make enemies for the US government all over the world.

  11. US hypocrisy knows no bounds:

    Texas banks are preparing a lawsuit against the federal government - to resist reporting on non-resident accounts, so as not to lose all those juicy deposits - yet the US demands transparency and FATCA reporting of all the other countries in the world. Similar to Texas, Florida bankers and politicians state that they are not in the business of policing non-resident accounts to assist other countries in tracking down their citizens.

    Now we find that during 2011, at the same time that US Treasury secretary Geithner was slandering and threatening ordinary individuals born and living outside the US, and enforcing extra-territorial citizenship-based tax, asset and BSA reporting, he made a secret deal to move to taxing US corporations (already allowed to hold all their profits offshore to avoid US tax) solely on a TERRITORIAL basis. This despite Geithner and Shulman's threats and slander, and charges of 'not paying a fair share' in their dishonest and disingenuous pursuit of ordinary people and their non-US children, who were born and living and paying taxes to the country where they live legally' abroad'.

    And now we learn that all along, Geithner was privately making a deal with US corporations;

    ......."Corporate America is pushing for the United States to move to such a regime to make businesses more competitive against foreign rivals that pay no taxes on overseas earnings. The United States currently taxes corporate profits earned abroad only when they are brought into the country.

    In 2011, then Treasury Secretary Timothy Geithner privately agreed to move to such a regime in failed talks with Republicans to secure a major budget deal, according to aides present.".......

    What a telling and shameful difference between the way the US IRS and Treasury are treating ordinary individuals paying taxes in full where they work and live and bank; who've never even lived in the US, and/or were born outside it - as citizens of another country - with the only tenuous connection being via accidental US parentage or birthplace, contrasted with the way Geithner and Obama treat US corporations - US companies who are already working fulltime to actively avoid paying taxes to the US where they are actually based.

    We who already pay taxes in full where we were born, and live and work and bank, outside the US, are slandered as criminal tax cheats, but US corporations with US headquarters and presence, get access and backroom deals with the Treasury and IRS.

    Obama isn't our president. He apparently works only for US corporations.
    That is where the tax gap is.

    The old Treasury secretary Geithner is a friend of the too-big-to-fail-US-banks. The new one is a Wall street and financial sector pal.

    And the US looks to impose double taxes and FBAR and FATCA penalties on ordinary individuals who've already paid tax in full to one government - the non-US one where they actually live and receive services.

    Expatriations will only increase.

    Who could be proud of a country that demonstrates such a lack of decency and honesty as we see in these examples. There is no democracy at work in the US.

  12. Excellent comment above (US hypocrisy knows no bounds).

    I have a few questions. Where are you, Mr. Mopsick, and why won't you engage your readers in any kind of meaningful dialogue about FATCA? Do you have no response for the many individuals who have left informative and thoughtful comments here? Are you truly convinced that "compliance" the only option out there? Do you ever consider actively fighting against FATCA instead of being an apologist for it and for the IRS?

    This isn't a mere technocratic taxation issue any more, sir; it is a moral issue. Which side of history will you be on?

    1. ....Do you ever consider actively fighting against FATCA instead of being an apologist for it and for the IRS?.... YOU CAN TAKE THE MAN OUT OF THE IRS BUT YOU CANNOT TAKE THE IRS OUT OF THE MAN !!!!!!

    2. Dear Anonymous: I try to respond either directly or privately via e mail to all serious questions raised in my practice area which is IRS controversy and litigation and international IRS enforcement. I am not a lobbyist, a public official, or an advocate for any particular cause. I feel passionate about the unintended consequences of FATCA and FBAR reporting on Americans living abroad and recent immigrants to the United States and I have expressed myself on numerous occasions in the articles I have published and through comments I have made here and elsewhere on the Internet or in public speeches. I certainly don’t mind it if people want to use my blog as a place to gripe over real or perceived injustices. I tend to react to statements and positions people take which are based on a perception of government and the rule of law which does not conform to my experience over 43 years of government service and private practice. The IRS is not an enemy but rather a conglomeration of individuals who are trying to do a very difficult job in the face of a Congress and a public who by and large do not wish them well and actually hope they will fail and make mistakes. That is their right as American citizens.

  13. @Anonymous Hear Hear! We have taken the time to comment here and were hoping that Steven would interact with US. Appearantly not. I guess I'll just go back to IBS and Maple.


  14. Mr Mopsick, would you be kind enough to make a post sumarizing the conference you went to?

    1. Yes, Mopsick c`mon please share with us your experience from Miami... how did it feel to co-chair such an important event ?? Did you have goosebumps ?

    2. I am currently writing a post summarizing my trip to Miami. Please check back soon!

  15. Monday, March 4, 2013
    "IRS brushes aside the constitution to make way for FATCA"

    .........."there is a very large legal difficulty here. As I have said before (and have a feeling I will be saying repeatedly), the Executive Branch cannot simply bind the US to any agreement it wants to without doing violence to a constitutional process that has been expressly laid out and subject to decades of analysis and debate by the country's most preeminent legal minds.

    This is why the IRS has been very quietly implying that the IGAs interpret existing treaties. I don't agree on the merits that this could possibly be true, but the IRS needs it to be true because if it is not true, the only alternative is that the IGAs are sole executive agreements entered into by the executive branch with no congressional oversight whatsoever. That puts them on the most precarious legal ground in terms of foreign policy power in the US"......

    1. I have an enormous amount of respect for constitutional scholars and the constitutional FATCA issues being raised in good faith all over the world. My reaction is this is a legal issue which will not be resolved until after many, many years of litigation and controversy. In the meantime, business leaders around the world and the IRS are doing nothing but moving forward to implement the new statute. For those with skin in the game, no one is going to sit this one out and see if someone can miraculously convince the federal government to abandon a program which has already gained a tremendous amount momentum. The business men and women I know are more concerned about shareholder suits which may arise if current management proves itself to be asleep at the switch and the company misses a business opportunity and loses profits than they are about theoretical Constitutional questions. It is not to say people don’t care and it is not to say they do not recognize the issues. The bottom line here is since FATCA was passed in 2010, the business world is not sitting around griping. Its busy getting ready.

  16. @Steven @All

    The Swiss IGA is likely to be submitted for parliamentary approval in the summer session, not in March. A Swiss federal law has been drafted for the application of FATCA. The Federal Concil has launched consultation of the political parties, communes, and cantons. Please see IBS post with correspondance I just had with the Swiss State Secretariat for International Financial Matters as well as links to the documents broadcast to the aforementionned entities in consulation.

    1. Errata: Federal Council not Concil, sorry.

      Forgot to sign my nom de plume: Jefferson D Tomas

  17. take that Mopsick :



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