Sunday, May 6, 2012

Beyond FATCA

Itai Grinberg has a new paper about information sharing that will be of interest to the FATCA crowd.  From the abstract:
The international tax system is in the midst of a novel contest between information reporting and anonymous withholding models for ensuring that states have the ability to tax offshore accounts. ... Four incongruent initiatives of the European Union, the OECD, Switzerland, and the United States together represent an emerging international regime in which financial institutions act to facilitate countries’ ability to tax their residents’ offshore accounts. The growing consensus that financial institutions should act as “tax intermediaries” cross-border represents a remarkable shift in international norms that has yet to be recognized in the literature.
As a growing consensus, I'd say it's about as contested an issue as you can imagine, and for good reason as the commenters to this blog attest.   It is a remarkable shift, all right.

Grinberg likens FATCA to a provision in the UK- Liechtenstein treaty under which Lichtenstein agreed that its financial intermediaries would identify persons that may be liable to tax in the UK, and either obtain certification of compliance with UK tax obligations or close such accounts.  I don't know how that is working out in practice.  Grinberg notes that

In the last few years, the global landscape has changed radically. Interest in automatic information exchange grew in parallel to the mounting universal acceptance of information exchange upon request as a global norm. Since 2007, three models have emerged: the OECD’s authorized intermediary project, the EU’s Directive on Administrative Cooperation in the Field of Taxation and proposed revision of the EUSD, and the United States’ FATCA legislation. ... A fourth model, the Swiss anonymous withholding model, presents an even sharper contrast. Instead of offering an information reporting solution, this approach emphasizes anonymity in combination with a withholding regime for collecting revenue from non-resident account holders. 
However, focusing on the inconsistencies and conflicts between the emerging systems obscures their commonality, which is far more important than their differences. All four models share a key feature ... each requires domestic financial institutions to routinely provide cross-border administrative assistance to a sovereign outside the country in which the financial institution is located, and thereby serve as cross-border tax intermediaries. This alone is a critically important achievement. 
...In some sense this is a reclamation of sovereign authority over cross-border asset management, and in another sense it is an acknowledgement that multinational financial institutions are a necessary part of the mechanics of tax collection in a globalized economy.
Grinberg includes a discussion about how compliance with FATCA may require financial institutions to violate laws in their home countries, citing remarks by Acting Assistant Secretary Emily McMahon that acknowledge the difficulty and suggest the US is working hard to make this a bilateral or multilateral matter rather than a unilateral one.

This makes me think that FATCA could be to information sharing what 30% flat rate withholding on passive income is to tax treaties: a blunt force object meant to induce other countries to try to negotiate a better deal.

If that's so, then it may be only a matter of time until Canada, the main victim of FATCA, gets a favorable resolution.  But the arm-twisting effect seems to make FATCA even more pernicious from a sovereignty/democracy/diplomacy point of view.


  1. Interestingly enough Democrats Abroad is now involved on the FATCA issue. The individual running the effort is actually from Canada, Joe Green.

  2. Just as I expected House Republican and member of the Ways and Means Committee Charles Boustany sent a detailed letter to Treasury asking for detailed documentation on the decision making process for implementing the new non resident alien reporting. The stuff he is asking isn't just any old information its documents that could be quite useful for the Florida and Texas Bankers Association if they intend sue the Treasury Department to try to get the new rules thrown out(If is probably too weak of a word). When people say all of this is a done deal its never a done deal. The Administration does have a real problem in my mind whether you like FATCA(I don't) or non resident alien reporting(I do) in that the congressional "intent" of the FATCA legislation was to create a direct reporting between every FFI and the US, not to implement "intergovernmental" agreements or to implement non resident alien reporting(notwithstanding the benefits of doing so).