Is There An Account With My Name On It?

As the year 2014 quickly comes up on the calendar, we have to ask ourselves whether playing Russian roulette with a foreign bank account is still exciting or just too risky.
There has been a lot of talk about the U.S. not being able to obtain overseas financial and banking information on its citizens. Then the conversation rolled over to whether the European countries’ taxing authorities could get U.S. financial and bank information on its citizens banking in the U.S.

On 8 February 2012, HM Treasury (UK) announced that it had agreed on a government-to-government approach to improving international tax compliance and implementing the US Foreign Account Tax Compliance Act (FATCA), an act designed to tackle international cross-border tax evasion. FATCA, scheduled to come into force from 1 January 2014, imposes reporting requirements on Foreign Financial Institutions (FFIs) with regards to certain US accounts. In effect, the law obliges all FFIs to become information gathering agents of the US Internal Revenue Service (IRS) by threatening an FFI’s own US source income and sale proceeds with a 30% withholding tax. The broad definition of FFI in the act means that its introduction will not only have an impact on banks, but also on many other forms of financial intermediary. As a consequence FATCA may be a factor in a number of different finance transactions including, for example, derivatives and syndicated loans.

The implementation of FATCA is a potential problem for FFIs who may not be able to comply with the reporting, withholding and account closure requirements without contravening their own domestic laws on data protection and customer confidentiality. However HM Treasury, in a joint statement with the governments of France, Germany, Italy, Spain and the United States, has sought to relieve these concerns. The statement, refer below, states the intentions to overcome the legal impediments to compliance through the use of existing bilateral tax treaties for information exchange between tax authorities. This overcomes the obstacles of direct reporting by FFIs to the US IRS; such as conflict of laws with Hong Kong laws protecting this information under its privacy laws.

Joint Statement regarding an Intergovernmental Approach to Improving International Tax Compliance and Implementing FATCA

A. General Considerations

1. Building on their longstanding and close relationship with respect to mutual assistance in tax matters, the United States, France, Germany, Italy, Spain and the United Kingdom wish to intensify their co-operation in combating international tax evasion.

2. On 18 March 2010 the United States enacted provisions commonly referred to as the Foreign Account Tax Compliance Act (FATCA), which introduce reporting requirements for foreign financial institutions (FFIs) with respect to certain accounts. France, Germany, Italy, Spain and the United Kingdom are supportive of the underlying goals of FATCA. FATCA, however, has raised a number of issues, including that FFIs established in these countries may not be able to comply with the reporting, withholding and account closure requirements because of legal restrictions.

3. An intergovernmental approach to FATCA implementation would address these legal impediments to compliance, simplify practical implementation, and reduce FFI costs.

4. Because the policy objective of FATCA is to achieve reporting, not to collect withholding tax, the United States is open to adopting an intergovernmental approach to implement FATCA and improve international tax compliance.

5. In this regard the United States is willing to reciprocate in collecting and exchanging on an automatic basis information on accounts held in US financial institutions by residents of France, Germany, Italy, Spain and the United Kingdom. The approach under discussion, therefore, would enhance compliance and facilitate enforcement to the benefit of all parties.

6. The United States, France, Germany, Italy, Spain and the United Kingdom are cognizant of the need to keep compliance costs as low as possible for financial institutions and other stakeholders and are committed to working together over the longer term towards achieving common reporting and due diligence standards.

7. In light of these considerations, the United States, France, Germany, Italy, Spain and the United Kingdom have agreed to explore a common approach to FATCA implementation through domestic reporting and reciprocal automatic exchange and based on existing bilateral tax treaties.

B. Possible Framework for Intergovernmental Approach

1. The United States and a partner country (FATCA partner) would enter into an agreement pursuant to which, subject to certain terms and conditions, the FATCA partner would agree to:

Pursue the necessary implementing legislation to require FFIs in its jurisdiction to collect and report to the authorities of the FATCA partner the required information;

Enable FFIs established in the FATCA partner (other than FFIs that are excepted pursuant to the agreement or in U.S. guidance) to apply the necessary diligence to identify US accounts; and

Transfer to the United States, on an automatic basis, the information reported by the FFIs.

2. In consideration of the foregoing, the United States would agree to:

Eliminate the obligation of each FFI established in the FATCA partner to enter into a separate comprehensive FFI agreement directly with the IRS, provided that each FFI is registered with the IRS or is excepted from registration pursuant to the agreement or IRS guidance;

Allow FFIs established in the FATCA partner to comply with their reporting obligations under FATCA by reporting information to the FATCA partner rather than reporting it directly to the IRS;

Eliminate U.S. withholding under FATCA on payments to FFIs established in the FATCA partner (i.e., by identifying all FFIs in the FATCA partner as participating FFIs or deemed-compliant FFIs, as appropriate);

Identify in the agreement specific categories of FFIs established in the FATCA partner that would be treated, consistent with IRS guidelines, as deemed compliant or presenting a low risk of tax evasion;

Commit to reciprocity with respect to collecting and reporting on an automatic basis to the authorities of the FATCA partner information on the U.S. accounts of residents of the FATCA partner

3. In addition, as a result of the agreement with the FATCA partner described above, FFIs established in the FATCA partner would not be required to:

Terminate the account of a recalcitrant account holder;

Impose pass-through payment withholding on payments to recalcitrant account holders;

Impose pass-through payment withholding on payments to other FFIs organized in the FATCA treaty partner or in another jurisdiction with which the United States has a FATCA implementation agreement;

4. The United States, France, Germany, Italy, Spain and the United Kingdom would:

Commit to develop a practical and effective alternative approach to achieve the policy objectives of pass-through payment withholding that minimizes burden.

Commit to working with other FATCA partners, the OECD, and where appropriate the EU, on adapting FATCA in the medium term to a common model for automatic exchange of information, including the development of reporting and due diligence standards.

COMMENT:

Now, you might be thinking there are only France, Germany, Italy, Spain and the United Kingdom agreeing, in principal, with the U.S. on this Joint Statement, refer below. That leaves several other counties with Bilateral Exchange of Information Agreements still able to function without the risk-laden effect of FATCA. Is that right?

Here is the current list of countries with Exchange of Information Agreements with the U.S.

Armenia
Australia
Austria
Azerbaijan
Bangladesh
Barbados
Belarus
Belgium
Bulgaria
Canada
China
Cyprus
Czech Republic
Denmark
Egypt
Estonia
Finland
France
Georgia
Germany
Greece
Hungary
Iceland
India
Indonesia
Ireland
Israel
Italy
Jamaica
Japan
Kazakhstan
Korea
Kyrgyzstan
Latvia
Lithuania
Luxembourg
Malta
Mexico
Moldova
Morocco
Netherlands
New Zealand
Norway
Pakistan
Philippines
Poland
Portugal
Romania
Russia
Slovak Republic
Slovenia
South Africa
Spain
Sri Lanka
Sweden
Switzerland
Tajikistan
Thailand
Trinidad
Tunisia
Turkey
Turkmenistan
Ukraine
Union of Soviet Socialist Republics (USSR)
United Kingdom
United States Model
Uzbekistan
Venezuela

It is just a matter of time before the rest of the countries come on board and when they do; your risk level may be no longer tolerable or wise. Then, you have to ask yourself the next question; will this new compliance agreement be applied retroactively? This, in my opinion, is a real probability. How long will it take these countries to set up such reporting and compliance structures? Well, these countries already have well established bilateral reporting under the Exchange of Information Agreements in which financial information is transmitted over the night sky between these countries, just not specifically on Foreign Financial Institutions. Since the U.S. has tired to bring U.S. Dollars into the U.S. by not requiring non-U.S. Citizens to file, report or pay tax on interest income in U.S. banks; this will also change. Countries like Mexico with its citizens having massive bank accounts in Southern California that go unreported to the Mexican authorities may now change.

CONCLUSION:
Now is certainly the time to beginning your tax and financial planning as the year 2014 approaches as well as planning for the retroactive application. Remember, if you have no plan you will lose because as you can see from the above, the IRS already has its plan. Contact a competent international tax attorney for a confidential meeting about your particular situation at your earliest opportunity.