Thursday, January 10, 2013

FATCA will/will not work: discuss

TJN ran two stories recently on FATCA's impact on tax competition. Which is right?

Story #1 says Austria and Luxembourg "may be forced to abandon banking secrecy because, in agreeing to implement FATCA with the US:
"EU member states could impose [automatic information exchange] on these two recalcitrant jurisdictions by invoking the 'most favoured nation' clause, explains Pascal Saint-Amans of the OECD."
 EU Directive 2011/16/EU contains a most favoured nation clause: if a Member State provides wider cooperation to a third country than that provided for under the directive it may not refuse such wider cooperation to another Member State that requests it on its own behalf."
So if these countries provide automatic information exchange to the U.S., then they are not allowed to refuse it to other E.U. member states.
TJN says thanks to FATCA, "the all-important amendments to the EU Savings Tax Directive are therefore likely to be passed this year, and Swiss efforts to torpedo this transparency initiative will have failed." Conclusion: FATCA will turn into its ultimately goal, a global tracing system under which no one can hide behind bank secrecy to evade their taxes, what some like to call GATCA.

Story #2 says Hong Kong is set to grab all the tax haven business:
Hong Kong just became an even better place for company directors who value secrecy. The Chinese territory, already ranked fourth in a list of 71 "secrecy jurisdictions" by the Tax Justice Network, has proposed new laws making it harder to identify the directors of non-public companies.
TJN says in response: "Tax havens. As we have said - this is where real power in the world increasingly lies. And the race to the bottom on secrecy continues apace."

If FATCA will shut Austria and Luxembourg as tax havens, why not Hong Kong?

The IGAs don't, I think, really explain things: in the absence of IGAs, FATCA is supposed to apply directly to all foreign financial institutions.  So it is the IGAs that would change the scene on the EU directive.  These agreements, let's be fair, really don't have a single thing to do with the FATCA statute from a legal perspective.  In other words, no one in the world needs FATCA to order into an agreement on automatic information exchange, countries could have (and in some cases have already--US, Canada) agreed on automatic info exchange years, decades, and even a century ago (which in fact they also did, see some of US early agreements).  FATCA is just a very big stick that is forcing Luxembourg and Austria to so agree, thus apparently opening themselves up to similar agreements throughout the EU.  Score one for dreams of multilateralism, but only among rich countries.

But Hong Kong, poised to take over, shows why FATCA can't get us to GATCA, i.e., there will be no worldwide information exchange, and the world is still safe for tax cheats. The reason for this lies in s S. 1471(f), which reads:

Subsection (a) shall not apply to any payment to the extent that the beneficial owner of such payment is—
(1) any foreign government, any political subdivision of a foreign government, or any wholly owned agency or instrumentality of any one or more of the foregoing...
(3) any foreign central bank of issue...

Translation seems to be: no big stick on payments that go to state-owned financial institutions.  That, I take it, describes China's entire financial system, including Hong Kong and Singapore.  Tell me if I am wrong about this, because I truly want to know.  If I am right, then FATCA moves tax havens around on the board but doesn't actually end the gravy train for tax cheats.

If that in turn is true, then the application of onerous compliance and filing issues on americans living in high tax countries to try to hunt down tax cheats who will not even be there seems particularly troublesome.


  1. There is an argument I hear from some pro-Fatca-ites which is something akin to following. If Canada lets says no to FATCA no IGA no PFFI etc then well why would anyone expect Austria, Luxembourg, Switzerland, Singapore, or Hong Kong to go along with it. As such in the eyes of some pro FATCAites Canada not the tax havens will have the "blood" of tax evasion on its hands. I for one think this is a very real possibility still.

  2. The second issue is as to the EU Savings Directive. I actually think one element of the EU STD is actually relevant to the subject of FATCA or at least FATCA IGA's. The EU STD does require a certain degree of customer "due dillengce" that one might view as a more minimalist version of FATCA. From the perspective of a bank or FFI any account that is "local" or "resident" to the country of residence of the bank is considered automatically out of scope of the EU STD and not subject at all to any EU STD due dilligence. For these reason even though it is legal for EU banks to solicit customers across borders some choose to only take "local" account holders in order to reduce costs and not have to put in place the computer systems for EU STD compliance. Metro Bank in the UK is one institution that I believe does this.

    As you can see Metro is basically interested in UK Resident retail banking. Why do they want to waste money on putting in place systems for EU STD compliance. How will Metro deal with FATCA though? Well it looks to me Metro might very well qualify as a local FFI. Which would be really self defeating for the US because Metro has a reputation for being REALLY popular among US Expats in the UK.

  3. The other issue I will mention is FATCA doesn't do anything implicitly for non EU nations like Japan, Canada, Australia, New Zealand etc(even in the context of all those countries being rich). Yes, I can see how the EU would view FATCA as an indirect way of putting pressure on their "own" tax haven like Austria like Switzerland in the context of the EU Savings Tax Directive. However, I don't the link between Switzerland signing an IGA with the US and Switzerland providing automatic exchange of information with Australia lets say whether or not Australia signs an IGA with the US. Along these lines the UK son of FATCA looks to just apply to UK territorries and crown dependencies not other third countries like Canada or Singapore that are not legally part of the UK.

    My overall feeling is if you are someone who things we need more AIE and more multilateralism and international cooperation in tax administration but yet feel FATCA has been the ONLY mechanism to date to move these goals forward then I think you are really up the creek without a paddle because the closer you analyze FATCA in my opinion the more the flaws become. Increasingly I get the sense there are two groups of people who look at FATCA. Group One are US Expats, people with a civil liberties bent(i.e. Abby Deshman, Sylvie Goulard, Sophie In't Veld), accidental Americans, and a certain segment of Canadian nationalists. This first group(which also includes myself in ful disclosure)wants FATCA gone damn the consequences. The second group I think actually has many of the same views on FATCA as the first but is made up of tax "professionals" and other more familar with tax law and tax administration. Group 2# increasingly realizes that FATCA is not particular well thought out either but feels to throw it out(repeal as Jim Jatras suggests) the window would basically be one of the worst defeats ever in "their" view for international cooperation in tax administration and would probably lead to the demise of the "income" tax as a method of "Tax."(This view I think is a result of the fact that every effort to cut down on offshore evasion pre FATCA ended up basically being complete failures). As such group 2 is desperately trying to put as much lipstick as they can on the FATCA pig but avoiding at all costs actually re-opening the FATCA "legislation" as passed by Congress(Perhaps because they feel Congress would just assume repeal rather than modify FATCA at this point). Perhaps there is a way of reconciling the view of Group 1 and Group 2. I for one as a member of Group 1 am quite open to this but to date I have not found any way or suggestion as to how to cut a deal between the two groups.

  4. FATCA intergovernmental agreements exposed as bad deal for partner countries

    This will be a disaster for all concerned, and it will make enemies for the US government all over the world.

  5. Of course FATCA won't work. I think a more interesting question is: 'How long will it be until FATCA is derailed, and how much damage will it cause in the interim'.