Foreign Account Tax Compliance Act

• Author: David Kerzner, David W. Chodikoff
• Pages: 273-305

273

chapter nine

FOREIGN ACCOUNT TAX COMPLIANCE ACT

A INTRODUCTION

The focus of this chapter is on providing a policy background to and an exam-

ination of the Foreign Account Tax Compliance Act, a unique piece of US tax

legislation that has no precedent in the history of international tax law.1 As

detailed in Chapter 3, the exchange of information (EOI) upon request stan-

dard in use between 2002 and 2016 is f‌lawed, but that is not the only weakness

in the OECD’s ef‌forts to combat tax evasion. As explained in Chapter 8, the

US FATCA initiative has been a driving force and an impetus for the G20 and

OECD’s launch of automatic exchange of information (Automatic Exchange).

While the goal behind FATCA, noted below, of curbing the use of tax havens to

hide income of US taxpayers residing in the United States is consistent with

the principles of equity in international tax policy, discussed in Chapter 2, the

same cannot be said of FATCA’s application to millions of individuals in Can-

ada, the United Kingdom, and the European Union who are US nationals but

not tax evaders. The new regime acts to drive these people into the enforce-

ment cannons of the IRS, which, as described in Chapter 10, can be f‌inancial-

ly and psychologically traumatizing. As explained in Chapter 11, refocusing

American enforcement on residence rather than nationality would make the

administration and enforcement of the data collected through FATCA more

consistent with the principles of equity in international tax policy.

This chapter also provides an overview of the rules contained in the hun-

dreds of pages of regulations and guidance relating to FATCA, of which any

1 Subtitle A of Title V of the Hiring Incentives to Restore Employment Act of 2010, Pub L No

111–147 enacted on 18 March 2010 [FATCA].

274 • InternatIonal tax evasIon In the Global InformatIon aGe

in-depth analysis is beyond the scope of this book. The overview that fol-

lows the policy discussion below explains the intergovernmental agreement

(IGA) mechanism behind FATCA and provides a synopsis of the IGA between

Canada and the United States.

B FATCA AND INTERNATIONAL TAX POLICY

In 2010, Congress unveiled a landmark foreign-reporting weapon targeting

foreign f‌inancial institutions (FFIs) that is known as FATCA.2 Simply stated,

FATCA requires FFIs to identify to the IRS accounts owned by US citizens

or become subject to a 30 percent withholding on all of their US sourced

investment income.3 Notably, neither Automatic Exchange nor tax informa-

tion exchange agreements (TIEAs) contain an equivalent or similar penalty

feature.4 FATCA is largely a congressional response to address international

tax crimes and abuses of the US foreign-reporting rules by US taxpayers and

FFIs that were exposed during Congress’s investigations into tax havens. Al-

though modelled after the qualif‌ied intermediary program, FATCA is about

reporting, not collecting withholding tax.5 Under FATCA, FFIs are being

deputized into the enforcement ranks of the US Department of the Treasury

by being required to report to the IRS accounts owned by US persons (direct-

ly and indirectly), including extensive information relating to these accounts.

FATCA has two primary tactical objectives in f‌ighting international tax

evasion. The f‌irst is to provide to the United States additional tools supporting

2 Ibid. FATCA was in large measure a response to the tax evasion and Swiss bank scandals that

Congress was investigating in 2008 and 2009: see Scott D Michel & H David Rosenbloom,

“FATCA and Foreign Bank Accounts: Has the U.S. Overreached?” 62:9 Tax Notes International

709 (30 May 2011); Staf‌ford Smiley, “Qualif‌ied Intermediaries, the EU Savings Directive,

TRACE—What Does FATCA Really Add?” (2011) 38 Journal of Corporate Taxation 20 at 25,

noting that the bank scandals involving UBS and Liechtenstein were closely watched by

Senator Carl Levin, chair of the Permanent Subcommittee on Investigations of the Senate

Committee on Homeland Security and Governmental Af‌fairs, which conducted extensive

hearings on tax havens and the use of FFIs by US tax evaders.

3 See f‌inal FATCA regulations implementing Chapter 4, Subtitle A of the Internal Revenue Code,

USC 26 (1986) of 1986, as amended, and the Treasury Regulations issued thereunder [Code]:

Regulations relating to Information Reporting by Foreign Financial Institutions and Withholding on

Certain Payments to Foreign Financial Institutions and Other Foreign Entities, 26 CFR Parts 1 and

301, ef‌fective 28 January 2013 [Final FATCA Regulations].

4 For an examination of TIEAs and Automatic Exchange, see Chapters 3 and 8 respectively.

5 See also United States, Department of the Treasury, Press Release, “Joint Statement from the

United States, France, Germany, Italy, Spain and the United Kingdom regarding an Intergov-

ernmental Approach to Improving International Tax Compliance and Implementing FATCA”

(8 February 2012), online: www.treasury.gov/press-center/press-releases/Documents/ 020712

%20Treasury%20IRS%20FATCA%20Joint%20Statement.pdf [Intergovernmental Joint Statement].

Foreign Account Tax Compliance Act • 275

the enforcement of worldwide taxation on those citizens and residents who

have successfully been able to illegally hide foreign income in of‌fshore ac-

counts.6 The second objective is to dissuade FFIs from continuing to hide US

account holders by penalizing FFIs.7 In enacting FATCA, Congress is seek-

ing to press FFIs into heavy-handedly policing a f‌lawed US reporting system

and, also, to compensate for the many shortcomings within the existing US

network of information exchange protocols in tax conventions and TIEAs.8

Moreover, the United States looks upon FATCA as a means of extending the

scope of its domestic information-reporting regime (applicable in large part

to US third-party payors) to encompass FFIs (and certain non-f‌inancial for-

eign entities). In doing so, the United States is striving to maintain fairness

in its tax system, by inhibiting US taxpayers from using global investment

opportunities to evade US tax by hiding money in of‌fshore accounts.9 While

this reasoning is applicable to US residents and citizens who live in the

United States, we do not believe that it is applicable to US nationals abroad

who have been absorbed by the foreign countries where they have lived and

paid taxes for all or most of their lives. We believe that in this circumstance,

when considering the millions of US expatriates living in Canada, the United

Kingdom, and the European Union who are not tax cheats, FATCA poses ser-

ious questions regarding the principles of equity and fairness. One of the

6 See Smiley, above note 2 at 25; Itai Grinberg, “The Battle over Taxing Of‌fshore Accounts”

(2012) 60 UCLA Law Review 304 at 334.

7 See Smiley, above note 2 at 5; Grinberg, above note 6 at 334.

8 See Grinberg, above note 6 at 334, noting that a purpose of FATCA is ensuring, by coercion,

the participation of FFIs in an automatic information-reporting system. Professor Grinberg

also discusses the problems posed by the unilateral reporting under FATCA, which benef‌its

the United States solely, and he refers to a former US Department of the Treasury of‌f‌icial

on tax policy, Emily McMahon, commenting on such problems and of‌fering the view that

FATCA is a vehicle to transitioning to a multilateral system (ibid at 336–37). See also Chapters

4 and 5 for a discussion of the existing frameworks for international EOI between sovereigns

and related current developments from the Canadian and US legal perspectives respectively.

9 See Regulations relating to Information Reporting by Foreign Financial Institutions and Withhold-

ing on Certain Payments to Foreign Financial Institutions and Other Foreign Entities, 77 Fed Reg

9022 (15 February 2012). The preamble to the proposed regulations reviews the US reporting

rules applicable in principle to require US (emphasis added) third-party payors to document

their third-party payees and report certain types of payments made to those payees (e.g.,

Chapter 61 of Subtitle A of the Code, above note 3, comprising in relevant part §§6041–49,

which require certain payors to document their third-party payees and report certain types

of payments, such as interest, dividends, and gross proceeds from broker transactions). The

preamble also reviews rules in Chapter 3 of Subtitle A of the Code, comprising §§1441–64,

which generally require withholding agents to document their payees and to withhold and

report with respect to certain US sourced payments to foreign persons. Essentially, the

policy ef‌fect under FATCA is to impose similar reporting obligations on FFIs and certain

non-f‌inancial foreign entities. This is both monumental and historic.