STEP

Title Research

European Commission complains to US over FATCA requirements

07 April 2011

The head of the European Commission's tax policy office has criticised the disclosure provisions imposed by the US Foreign Account Tax Compliance Act on European banks.

The complaints are set out in a letter sent on Tuesday to US treasury secretary Timothy Geithner, and simultaneously to Doug Shulman, commissioner of the US Internal Revenue Service. It is co-signed by the European tax commissioner, Algirdas Semeta, and by the European Union Presidency (currently held by Hungary whose finance minister is Gyorgy Matolcsy).

FATCA was enacted by the US presidency a year ago, as part of the Hiring Incentives to Restore Employment Act. It gives the IRS new powers against offshore non-compliance by taxpayers, dramatically affecting US persons who hold bank accounts or other assets at institutions outside the US.

Under the Act, US taxpayers must reveal to the IRS all overseas accounts holding $50,000 or more. The Act also has extraterritorial effect, in that the US government requires non-US banks to disclose such accounts of their own accord. Any institution that refuses to cooperate will be faced with a 30 per cent withholding tax imposed by the IRS on payments made into the USA.

Many European banks have already decided not to deal with American clients because of this. In the meantime, they have been passing their objections to the European Commission in the hope that something can be done at a political level.

Hence the Semeta-Matolcsy letter, which warns the US authorities that FATCA will have a "severe impact on the EU financial industry in terms of costs of compliance and penalties in cases of non-compliance".

Semeta says FATCA's requirements are too wide-ranging. He suggests the US should introduce exemptions for banks conducting activities on behalf of their American clients where there is a very low risk of tax evasion.

If the US authorities refuse to make any concessions, says Semeta, a significant number of EU-based financial institutions will simply quit the US market. This has already happened to some extent, with expatriate American taxpayers finding increasing difficulties in maintaining a bank account even in their country of residence.

Semeta also points out that FATCA's provisions may conflict with EU member states' internal data protection laws. These laws forbid banks to pass sensitive personal data about individuals to certain non-EU countries - of which the USA is one.

As a longer-term solution to the problem, Semeta's letter suggests a more general tax cooperation agreement between the USA and EU. This could, he says, be based on new IRS guidance to US financial institutions on their duty to report interest paid to non-resident individuals, and possibly also on the soon-to-be-amended EU Savings Directive.

David Harvey, CEO of STEP said: “Complying with the US Foreign Account Tax Compliance Act (FACTA) could impose a significant compliance burden on EU financial institutions, including trustees, and STEP therefore welcomes the efforts of the European Commission and the Hungarian EU Presidency to engage with the US tax authorities on the issue. It would clearly be desirable for the EU and the US to agree common reporting systems for both FATCA and the EU Savings Tax Directive to help reduce the substantial compliance costs on financial institutions, advisors and their clients.” 

• The EU's official response to FATCA has been gestating for some time. Semeta gave a speech to the American Chamber of Commerce in December 2010 along much the same lines.

 

 

Sources

EU Presidency (PDF)

European Commission

Semeta's Dec 2010 speech

 


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