Written by David Henderson on Monday 3 December 2012
It has recently been announced that implementation of the Foreign Account Tax Compliance Act, aka FATCA, has been delayed yet again. So the question I’ve been pondering is: Will the original “full fat” version of FATCA be consigned to the annals of history before it ever gets a chance to collect a dollar? I rather think it will, but does this mean that it has failed? Defiantly not, let me explain why.
The original ‘full fat’ version of FATCA, which let’s remember has been around since it was signed into US law in March 2010, has still not seen final regulations published. This is because it is unworkable. The conflict between local laws and a voluntary agreement with the US, albeit backed with the threat of a punitive withholding tax, left financial institution around the world in a no win situation. In fact legal experts tell me that of all the jurisdictions that they have examined only one would allow FATCA compliance within the local laws, not a great way for the US to find its tax cheats.
Sounds like a failure doesn’t it? And if that was the only game in town it would have been. Let us imagine what could have happened; rather than face the choice between being subject to withholding taxes or penalties of breaking local laws, financial institutions would have had to advise customers to sell US assets, causing a crash in the US economy and the value of those assets. So as American foreign policy goes FATCA was more ‘shock and awe’, than a quiet dinner with the Ambassador. What this did achieve however was increased interest from both debt ridden western nations and the rapidly growing BRIC countries in maximising their tax revenue by clamping down on tax evasion by their own individual and corporate taxpayers.
So what is the other game? Intergovernmental Agreements or IGAs. We’ve seen two different models so far for the 7 counties that have been announced, but with 50-60 countries thought to be in negotiations there could be further variation to come. IGAs help by finding a way around the local laws that would have caused the no win situation I described earlier, either by the non-US government changing the laws or by facilitation to bypassing them. And why would they do this? Well depending on the country they might want information back from the US or they might just want to ensure that their financial institutions can continue to operate and drive their economy. The important thing is that this is no longer a unilateral action being imposed on the rest of the world; it is an opportunity for collaboration.
One of the most interesting bits of the IGA signed by the UK includes the following:
“The Parties are committed to working with other partners, the Organisation for Economic Co-operation and Development, and the European Union, on adapting the terms of this Agreement to a common model for automatic exchange of information, including the development of reporting and due diligence standards for financial institutions.”
This seems to me to be a clear intention to expand the scope of information exchange from pure bilateral agreements between the US and FATCA Partners, to multilateral sharing across any countries that sign up, via a network of IGAs covering the globe. So as discussed in my webinar FATCA and the Tax Iceberg financial institution need to do more than just focus on finding US customers or they may find themselves repeating the exercise again and again.
“Full fat” FATCA only ever had one potential winner and many losers; did the US really think that this equivalent of “taxation without representation” would work? Who knows, but if the governments of the world act together through IGAs the impact on the financial service industry can be minimised and the opportunity for tax evasion reduced and if this increases tax revenue then, as taxpayers, we all win.