US changes way the world works

Amer­i­cans’ stron­garm tac­tics re­gard­ing tax com­pli­ance and in­for­ma­tion have mush­roomed across the globe

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - DALILA VER ELST

WHEN the US first in­tro­duced the For­eign Ac­count Tax Com­pli­ance Act, it was de­scribed by the in­ter­na­tional bank­ing com­mu­nity as the “neu­tron bomb of the fi­nan­cial world”. Knee-jerk re­ac­tions across the globe screamed: “Im­pos­si­ble!”

But over the last four years the US has worked hard to make the act 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 US achieve ex­trater­ri­to­rial ap­pli­ca­tion of its leg­is­la­tion? It didn’t. Yet we are all danc­ing to the tune of the act and learn­ing its ap­palling acronyms. How did it hap­pen? The first re­ac­tion from the in­ter­na­tional fi­nance com­mu­nity was that com­pli­ance would not be per­mit­ted un­der lo­cal laws. The US 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 in­ter­gov­ern­men­tal agree­ments, known as IGAs, 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 the For­eign Ac­count Tax Com­pli­ance Act (Fatca) so that fi­nan­cial in­sti­tu­tions in those ju­ris­dic­tions can com­ply with the act 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, which does not re­place Fatca or UK CDOT; rather it is in ad­di­tion to both.

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 Com­mon Re­port­ing Stan­dard is a mul­ti­lat­eral ex­change of in­for­ma­tion, un­like Fatca IGAs 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.

Tax eva­sion is recog­nised as a global prob­lem which re­quires a global so­lu­tion. Fatca was a US Trea­sury re­sponse to the sim­ple eva­sive tech­nique by some US cit­i­zens with for­eign ac­counts who used their for­eign credit cards on those ac­counts while 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 mea- sure was re­quired. It is very dif­fi­cult to­day for a US per­son to main­tain a fi­nan­cial ac­count out­side of the US 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 obligations on all fi­nan­cial ser­vices providers and other busi­nesses. As in­for­ma­tion was du­ti­fully col­lected, it was in­evitable that tax au­thor­i­ties would want ac­cess to it.

Once the US showed the way, re­quests for au­to­matic ex­change of in­for­ma­tion mush­roomed.

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 Com­mon Re­port­ing Stan­dard re­quires fi­nan­cial in­sti­tu­tions to re­port fi­nan­cial in­for­ma­tion of ac­counts held by in­di­vid­u­als and en­ti­ties, in­clud­ing trusts and foun­da­tions, and by con­trol­ling per­sons of pas­sive non-fi­nan­cial en­ti­ties.

This year im­ple­men­ta­tion plans for au­to­matic ex­change of in­for­ma­tion are due to be sub­mit­ted by par­tic­i­pat­ing ju­ris­dic­tions and will be re­viewed by the global fo­rum which will be re­spon­si­ble for ju­ris­dic­tions’ com­pli­ance rat­ings. Next year re­views will begin, and in 2017 or 2018 the first ex­changes of in­for­ma­tion will take place. The mush­rooms will be ready for har­vest.


In­ter­gov­ern­men­tal agree­ment mod­els over­come lo­cal legal bar­ri­ers to the For­eign Ac­count Tax Com­pli­ance Act so that fi­nan­cial in­sti­tu­tions in those ju­ris­dic­tions can com­ply with the act and not suf­fer a 30% with­hold­ing tax threat­ened by the US


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