US Treasury concedes it must reciprocate on FATCA disclosures

26 January 2012

A senior US Treasury official has admitted that foreign countries will refuse to cooperate with the Foreign Account Tax Compliance Act unless US financial institutions reciprocate by providing them with information about their own taxpayers.

FATCA was enacted by President Obama in March 2010 and its provisions are now embodied as sections 1471-1474 of the Internal Revenue Code. It requires foreign financial institutions (FFIs) to report all their American clients' dealings to the US Internal Revenue Service, and to withhold payments to accountholders and to other FFIs according to the IRS's instructions. Any FFI that refuses will see the IRS impose a 30 per cent withholding tax on all its remittances from US investments.

Financial bodies and governments all over the world have protested at these requirements, partly on grounds of administrative cost and partly because they require some banks to breach their own countries' privacy laws.

In a speech to the New York State Bar Association earlier this week, the Treasury's assistant secretary for tax policy Emily McMahon conceded that FATCA "imposes significant new requirements and responsibilities on foreign financial institutions".

However, she said, sufficient progress had been made that "FATCA can in fact be implemented in a manner that is not overly burdensome when compared to its benefits".

"We are proposing a higher threshold for further investigation into potential US ownership [of bank accounts]", she said. For new accounts, the checking procedures required for FATCA purposes will as far as possible match those already required by anti-money laundering rules.

The Treasury is also planning to expand the categories of FFIs that it presumes be compliant with FATCA, so as to focus its attention on higher-risk institutions. There will also be a temporary moratorium on the rule that a global financial institution can only be compliant if all of its affiliated firms are also compliant.

However, McMahon also accepted that some countries' privacy laws prohibit its banks from complying with FATCA. One solution to this, she said, is for these countries to change their laws to suit the US administration's requirements.

As an alternative, the Treasury is suggesting that financial institutions of a particular country could report the information required by FATCA to their own government. The latter would then transmit the information to the IRS under an extended tax information exchange agreement.

But the US recognises that bilateral solutions require reciprocity, said McMahon. "We see no principled basis on which to require that financial institutions based in other countries collect and provide us with information on US taxpayers, if we take the position that our own institutions should be exempt from similar requirements", she said. "To the contrary, we believe that it will be critical to the success of our efforts to implement FATCA that we are able to reciprocate."

The Treasury's longer-term goal, she said, is a more comprehensive multilateral approach to information exchange. The bilateral agreements that it is now proposing to make FATCA work would be precursors to that goal.

"For that reason, we believe that FATCA, if implemented appropriately, can serve as a catalyst for further advances in the global effort to improve transparency and combat tax evasion", said McMahon.

Sources

US Department of the Treasury

Toronto Globe and Mail