Foreign Account Tax Compliance Act

AuthorDavid Kerzner, David W. Chodikoff
chapter nine
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.
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: 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.

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