Thursday, March 18, 2010

US: FATCat measures move towards automatic information exchange

ON 17th March the US Senate passed an Act (the Hiring Incentives to Restore Employment (HIRE) Act) which includes provisions relating to what is termed Foreign Account Tax Compliance (FATC). These provisions are designed as a revenue raising measure aimed at offsetting part of the costs arising from the job creation aspects of the HIRE Act. We have seen a memorandum on the FATC provisions, and can highlight some of their key aspects.

According to the memo, tackling offshore tax evasion is a central part of the provisions:

The overall purpose of the Foreign Account Tax Compliance legislation is to detect, deter and discourage offshore tax abuses through increased transparency, enhanced reporting and strong sanctions. The ultimate goal of the Taxes to Enforce Reporting on Certain Foreign Accounts portion of the legislation is for the United States to obtain information with respect to offshore accounts and investments beneficially owned by US taxpayers in an efficient and timely manner rather than have the New US Withholding Tax Regime imposed.

The legislation's central provision imposes a requirement on what are termed foreign financial institutions (FFI) and "other foreign persons" to identify and disclose US citizens holding accounts with them or become subject to a 30 per cent withholding tax. As the memo puts it:

Foreign financial institutions and other foreign persons affected by the legislation will have a simple choice to make as to whether they agree to the Taxes to Enforce Reporting on Certain Foreign Accounts portion of the legislation.

Those institutions and foreign persons that would like to invest on their own behalf or on behalf of clients in the US capital markets will have to agree to comply with the legislative provisions.

Those that do not agree to comply with the legislative provisions will suffer a 30% withholding tax and thus will be unable to compete with those foreign financial institutions and foreign persons that comply with the Taxes to Enforce Reporting on Certain Foreign Accounts portion of the legislation.


Furthermore, as the memo makes clear, the provisions extend to foreign investment vehicles that are ultimately owned by US citizens:

The FFI would be required to report information with respect to accounts for (1) Specified US Persons and (2) a US Owned Foreign Entity. A Foreign Investment Vehicle that is owned by a Specified US Person is a US Owned Foreign Entity of the level of ownership in that entity by the Specified US Person and thus is subject to reporting.

While these provisions do not take the form of an international treaty, they do represent a step towards automatic exchange of information, at least with regard to US persons with accounts outside of the United States.

One obvious weakness, however, lies with the absence of any measures to cooperate with other jurisdictions by offering a reciprocal arrangement to provide information about non-US citizens using US banks to evade tax. Indeed, as our colleague Sol Picciotto has pointed out, the summary requires the IRS to draft its proposed regulations "in a manner that will not discourage or disrupt foreign investment in US capital markets." So the leopard hasn't changed its spots.

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