FATCA Update: IRS Introduces FATCA Registration Portal While Foreign Financial Institutions and U.S. Expatriates Push Back

Aug 22, 2013   
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On August 19, 2013 the Internal Revenue Service officially introduced its new registration portal (available here) to assist Foreign Financial Institutions (“FFI”) as they attempt to comply with the Foreign Account Tax Compliance Act (“FATCA”). As noted in our previous blog entry regarding FATCA compliance available here, there have been significant delays in the implementation of FATCA primarily due to stalled negotiations between the United States and foreign governments which have yet to enter into Intergovernmental Agreements (“IGA”) because they do not want to open up their books to the U.S. and do not expect reciprocity from the U.S. regarding disclosure of its own domestic account holders. The IRS has made a significant push to have FATCA implemented promptly, but opponents to its implementation have offered valid justifications as to why FATCA may be an unworkable and ineffective means of collecting additional unreported tax revenue from foreign accounts held by U.S. taxpayers.

The Goal of FATCA

Pursuant to FATCA, FFIs are required to provide information about their U.S. clients to the IRS, a violation of which results in exposure for non-compliant FFIs to a 30 percent withholding tax. In response to these disclosure requirements, the U.S. Treasury Department developed model IGAs (available here) to assist foreign countries in implementing FATCA.

FATCA is being implemented in three phase so as to achieve an orderly exchange of information regarding offshore financial activity. The first phase consists of the implementation of FATCA itself, with the collection of information regarding the financial assets of U.S. accountholders in FFIs. In the second phase, FATCA partner countries will enter into bilateral agreements with each other to exchange information. Phase three provides for the transfer of this information to a centralized automated system with FATCA databases functioning as the central repository for offshore account information for all countries that are members of the Organization for Economic Co-Operation and Development (“OECD”). FATCA proponents expect this to result in a simple, powerful and scalable system that will promote worldwide fiscal transparency and provide each country’s respective tax authorities significant data on their foreign and domestic accountholders.

In theory, this seems like an efficient means of combating illegal tax evasion while simplifying the work of tax authorities. In practice, however, the enormous complexity has resulted in two legislative delays of FATCA deadlines and significant resistance from FFIs and U.S. expatriates.

FATCA Backlash & Possible Economic Consequences

The ongoing delay in the implementation of FATCA is providing FFIs with extra time to organize FATCA compliance procedures, and may also be evidence of problems with the legislation itself. Evidence suggests that FFIs and their respective U.S. accountholders are resisting the IRS snooping into their financial affairs and are frustrated with the expensive and cumbersome reporting and compliance burdens associated with FATCA

FFIs facing these heavy compliance burdens and additional tax exposure are considering whether it may be more financially feasible to simply drop American clients and investments altogether. This puts expatriates and Americans that invest internationally in a very unfavorable position because they are finding that they have fewer banking and investment options; see here. FATCA makes it more difficult for Americans doing business internationally to obtain bank accounts, qualify for loans, receive insurance coverage, and participate in company-sponsored pension plans. As early as 2011, for example, European banks such as Deutsche Bank, Commerzbank, HSBC, ING Group, and Credit Suisse began terminating their American customers’ accounts. Spokesperson of the expatriate group American Citizens Abroad (ACA), Jackie Bugnion, stated that:

many [expats] are furious about what FATCA means to them, and some are scared they will fall foul of the new rules unintentionally”¦Banks don’t want American customers anymore because of the hassles with FATCA. Expats are having accounts closed, and while they may find a bank offering a current account, deposit accounts are almost impossible to locate. Some expats have [even] had their mortgages cancelled and many are refused loans.

These complications go beyond personal banking. FATCA also complicates foreign direct investment with United States entities and investors, since American ownership makes a business subject to FATCA reporting. Under FATCA, FFIs are required to report any private foreign corporation, business, or partnership in which a U.S. citizen is a ten percent or greater shareholder; see here.

At 39.1 percent and approximately 14 percent higher than the OECD weighted average, the United States currently has one of the highest corporate tax rates in the developed world; see here. The United States already subscribes to double taxation of both dividends and capital gains for corporations, which are set to increase this year; and further requires U.S. firms operating abroad to pay taxes on their foreign-sourced earnings. Uniquely, the United States is also the only developed country that taxes its citizens living abroad.

So, what are the implications for Americans who invest internationally? Arguably, their involvement in international business could expose sensitive account information of their prospective foreign business partners to U.S. inspection and taxation. Because of this, foreigners may be reluctant to do business with U.S. citizens who may subject them to significantly higher tax exposure, investigation, inspection, and business risk; thus putting U.S. investors at a competitive disadvantage in the international marketplace.

Over the next ten years, FATCA is projected to unearth $8.7 billion of the nearly $40 billion annual cost of international tax evasion; see here. However, whatever may be gained by FATCA could be well outweighed by way of lost prospective foreign direct investment and global business deals which would otherwise contribute to the U.S. GDP and provide additional taxable revenue streams. From a purely economic standpoint, these lost opportunities could very well negate a large portion of the less-than-$1 billion that FATCA is projected to unearth annually over the next ten years.

Because of these issues, U.S. expatriates and investors are expressing outrage with both FATCA and cumbersome U.S. tax policies by disassociating themselves with the U.S. altogether. Over the past year there has been a significant surge in the number of Americans renouncing their U.S. citizenship; one of the more notable being Eduardo Saverin, the Brazilian-born co-founder of Facebook, who renounced his U.S. citizenship last year right before the company’s highly anticipated initial public offering (IPO). Bloomberg has reported (see here) the renunciation of U.S. citizenship increased nearly six-fold in the second quarter of 2013 to 1,131 in comparison to 189 for the same period one year earlier. Reports also attribute this surge to the increase in capital gains and income tax rates in 2013, and the overall difficulty U.S. expatriates are having preparing burdensome and complicated tax returns.

So is FATCA the Solution?

Despite the outcry, in the long-term, if implemented according to plan, FATCA could successfully curb illegal offshore activity in OECD member countries. The question is at what cost? Many argue that FATCA will result in more harm than good to the U.S. in the international marketplace.

Arguably, increased enforcement efforts through proven whistle-blowing initiatives such as the Offshore Voluntary Disclosure Program (discussed here) and stiffer non-disclosure penalties offer a more effective alternative for curbing illegal tax evasion and promoting tax revenue collection in a way that is less burdensome on expatriates and U.S. global competition.

As previously discussed (see here), for FATCA to truly be effective, FFIs will have to buy into the idea of globally-centralized information sharing of tax information. Currently only ten of the thirty-four OECD countries have signed IGAs. Nevertheless, the OECD as a whole appears to be on board, as evidenced by the OECD’s automatic information exchange initiative which is seeking to revolutionize global tax transparency and accountability; see here. Most recently, the British territory of the Cayman Islands, considered the world’s sixth largest financial center and major haven for mutual funds and private equity, stated that it too had reached an agreement with the U.S. to provide information on accounts held by American citizens; see here. The Cayman Island Financial Services Minister, Wayne Panton, has expressed his intentions of making the text of this IGA public once an official signing ceremony is held, and further stated that this agreement illustrates the Cayman Islands’ “commitment to engage in globally accepted tax and transparency initiatives.”

Whether FATCA will fail or succeed is not yet known, and it will be imperative for Congress and Treasury to carefully monitor the development and implementation of FATCA as it begins its roll-out to ensure that the problems it was created to resolve are fixed and/or mitigated rather than worsened and further complicated.

Fuerst Ittleman David & Joseph will continue to monitor IRS’s implementation of FATCA. For more information, please feel free to contact us via email at contact@fidjlaw.com or by phone at (305) 350-5690.