FATCA is a fungus
26 November 2014
Posted by: Authors: Dalila Ver Els and Anthony Markham
Authors: Dalila Ver Els and
Anthony Markham (Maitland)
When the USA first
introduced the Foreign Account Tax Compliance Act (FATCA) it was described by
the international banking community as the "neutron bomb of the financial
world”. Knee-jerk reactions across the globe were "Impossible”! But over the
last four years the US has worked hard to make FATCA possible notwithstanding
that, before the process started, it was simply illegal in many countries to
submit information of the nature requested to a foreign tax authority.
How did the
USA achieve extra-territorial application of its legislation?
It didn’t. Yet we are all dancing to the FATCA
tune and learning the appalling FATCA acronyms. How did it happen?
The first reaction from the international finance
community was that compliance would not be permitted under local laws. The USA
said "fine, but just to make sure we are closing the tax gap, we will withhold
30% of the proceeds (not profits) of any US investments that are redeemed to
any foreign account”. Ouch. The international financial community, and its
governments, had to talk. After all, almost all trade with the US does not
involve tax evasion; and 30% punitive tax on proceeds even when an asset is
sold at a loss, was untenable.
International co-operation was necessary, and the
spores of the information exchange fungus were packaged into two models of
Inter-Governmental Agreements, known as IGA’s, unimaginatively called Model 1
and Model 2. Under a
Model 1 agreement, financial institutions report to their own governments which
transmit the information to the IRS; under Model 2, the financial institutions
report directly to the IRS. Both models
overcome local legal barriers to FATCA so that
financial institutions in those jurisdictions can comply with FATCA and not
suffer a 30% withholding tax.
There are 45 IGAs signed and a further 56 IGAs "in
effect” between the US and other jurisdictions. Not surprisingly, partner jurisdictions like to
receive something in return from the US, and in many cases the agreements are
reciprocal (Model 1A).
Model 1B agreements are not reciprocal and are preferred by countries that do
not tax the foreign assets or income of their taxpayers.
Once it became apparent to tax authorities around
the world that FATCA-type legislation could work for them too, negotiations for
similar intergovernmental co-operation were spawned. The UK got in early with its special
intermediate toadstool for the UK Crown Dependencies and Overseas Territories,
known as UK CDOT. The process culminated
in the Common Reporting Standard
(CRS). Note that the CRS does not replace FATCA or UK CDOT, rather it is in
addition to FATCA and UK CDOT.
What is the
Common Reporting Standard (CRS)?
Countries that tax foreign gains of their
taxpayers wanted to follow the US example. The OECD and G20 developed the
framework by which greater international tax transparency could be achieved. This
culminated in the Common Reporting Standard, a reporting model based upon FATCA
and endorsed by all OECD and G20 countries on 29 October 2014, providing for
automatic exchange of information among them. The CRS is a multilateral
exchange of information, unlike FATCA IGA’s which are at best bilateral. The
multilateral exchange is due to begin in September 2017, certainly among the
Early Adopters Group.
Others will follow in 2018.
Why was the
Tax evasion is recognised as a global problem
which requires a global solution. FATCA was a US Treasury response to the
simple evasive technique of some US citizens with foreign accounts, to use
their foreign credit cards on those accounts whilst not paying taxes on funds
in those accounts at point of entry. Treasury investigations revealed that the
use of credit cards was only the tip of the iceberg, and a drastic measure was
required. What seemed impossible has been achieved, and it is very difficult
today for a US person to maintain a financial account outside of the USA
without it being reported to the IRS. Penal taxes and criminal liability for
tax evasion make an undeclared account a most undesirable prospect.
Secrecy in financial affairs was lost in the first
round of the global response to terrorism which has brought about strict Due
Diligence and Know Your Customer (KYC) obligations on all financial services
providers and other designated businesses. As the information was dutifully
collected and available, it was inevitable that tax authorities would want
access to it. Once the US showed the
way, requests for automatic exchange of information mushroomed.
How will CRS
Governments will enter into Competent Authority
Agreements with one another, and will obtain information on accounts and their
holders from financial institutions in their jurisdictions, and exchange it
automatically on an annual basis. In principle it has been agreed that beneficial
ownership of legal entities will be available and exchanged as well as
financial account information. Like the obligations under FATCA and UK CDOT,
the CRS requires financial institutions to report the financial information of
accounts held by individuals and entities, including trusts and foundations,
and by the controlling persons of passive non-financial entities.
When does reporting
under CRS start?
In 2015 the implementation plans for automatic
exchange of information are due to be submitted by participating jurisdictions.
These will be reviewed by the Global Forum
which will be responsible for compliance ratings of the jurisdictions. In 2016 reviews will begin, and in 2017
the first exchanges of information will take place. The mushrooms will be ready
 Early Adopters are: Argentina, Belgium, Bulgaria, Colombia,
Croatia, Cyprus, the Czech Republic, Denmark, Estonia, the Faroe Islands,
Finland, France, Germany, Greece, Hungary, Iceland, India, Ireland, Italy,
Latvia, Liechtenstein, Lithuania, Malta, Mexico, the Netherlands, Norway,
Poland, Portugal, Romania, Seychelles, Slovakia, Slovenia, South Africa, Spain,
Sweden, and the United Kingdom; the UK's Crown Dependencies of Isle of Man,
Guernsey and Jersey; and the UK's Overseas Territories of Anguilla, Bermuda,
the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat, and the
Turks & Caicos Islands
 Exchange of info by 2017: Anguilla, Argentina, Barbados, Belgium, Bermuda, British Virgin Islands, Cayman Islands, Chile, Colombia, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Dominica, Estonia, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Trinidad and Tobago, Turks and Caicos Islands, United Kingdom, Uruguay
 Exchange of info by 2018: Andorra, Antigua and Barbuda, Aruba, Australia, Austria, The Bahamas, Belize, Brazil, Brunei Darussalam, Canada, China, Costa Rica, Grenada, Hong Kong (China), Indonesia, Israel, Japan, Marshall Islands, Macao (China), Malaysia, Monaco, New Zealand, Qatar, Russia, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Samoa, Saudi Arabia, Singapore, Sint Maarten, Switzerland, Turkey, United Arab Emirates