Europe’s big five will help USA enforce FATCA

9 February 2012

The five largest European countries have signed an agreement to help the US government implement the Foreign Account Tax Compliance Act when it comes into effect in January 2013.

FATCA requires foreign financial institutions (FFIs) to report all their American clients’ dealings to the US Internal Revenue Service. They must also block payments to American clients and to other FFIs if ordered to do so by the IRS, and must close accounts belonging to individuals regarded by the USA as delinquent. Banks that refuse will see 30 per cent tax deducted from their earnings from US investments.

The legislation has attracted worldwide criticism, partly because of the compliance costs and partly because it would require banks to break the law in some jurisdictions. In particular, banks in European Union member countries are bound by the 1998 EU Data Protection Directive, which includes a general ban on the transmission of sensitive personal information to the USA.

But this week the governments of Germany, France, Spain, Italy and the UK agreed to collect this client account information from banks within their borders and pass it on to the US tax authorities on the banks’ behalf. They may also have to amend their own data protection laws.

The joint statement issued by the six governments commits the European countries to implement legislation “requiring” FFIs in their jurisdiction to collect FATCA information on bank clients. It is not clear whether banks will be permitted to opt out of this scheme if they elect not to comply with FATCA. The joint statement suggests that they will not be, although certain types of low-risk financial institution in the five jurisdictions will automatically be presumed by the IRS to be FATCA-compliant anyway.

Banks in these five countries that agree to check for American beneficial ownership of assets and to supply this information to their domestic governments will be treated by the IRS as compliant with FATCA. They will not have to sign an agreement with the IRS (although they will have to register with it) and they will not be subject to the 30 per cent withholding tax imposed by the IRS on non-FATCA-compliant banks. Nor will they be required to block payments to “recalcitrant” individuals, or collect US withholding taxes from other banks in the jurisdiction.

In return the USA has committed itself to collect information on US bank accounts operated by European residents and automatically pass it to the relevant national tax authority. This so-called “reciprocity” arrangement would be based on the countries’ existing bilateral tax treaties.

The European Commission issued a statement approving the agreement. It noted that FATCA compliance could have cost European multinational banks as much as $100 million if they had had to achieve it individually. The Commission also encouraged other EU member states to come to similar arrangements with the USA: “Any member state that wants to should now be able to adopt this government-to-government approach to information exchange through coordinated bilateral agreements with the USA”, it said.

The US Treasury stresses that it is not contemplating an exemption from FATCA “for any jurisdiction”. That may not please the Canadian government, which has been lobbying for just that. Instead, the US statement suggests that Canada is likely to be offered the same kind of model as the five European governments have accepted.




US Treasury Department (PDF)

UK Treasury statement


Dow Jones

European Commission




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