Wednesday, June 10, 2015

The Vatican Signs On To FATCA (6/10/15)

Rosie Scammell, Vatican and the U.S. sign historic agreement to go after tax evaders (Washington Post 6/10/15), here.
 The United States on Wednesday signed an agreement with the Vatican to trace American taxpayers hiding assets within the walls of the city-state, the latest step in the Holy See’s push for greater financial transparency. 
The deal sees the Vatican become the latest of approximately 62 countries to sign on to the U.S. Foreign Account Tax Compliance Act, a 2010 law that allows financial information to be directly reported to authorities in the U.S.  
It applies only to U.S. citizens and permanent residents, not organizations, and aims to identify people who are not annually declaring all of their foreign assets to the U.S. Internal Revenue Service. 
The information the Holy See is due to hand over under the law should have already been sent to the IRS by individuals, some of whom have already been warned of the new agreement. 
U.S. officials would not say how many American individuals hold money at the Vatican, but the number is believed to be rather small, perhaps in the dozens, according to the Vatican Insider.
Readers might alsoconsider this from Pope Paul's EVANGELII GAUDIUM, here (emphasis supplied by JAT):
No to the new idolatry of money 
55. One cause of this situation is found in our relationship with money, since we calmly accept its dominion over ourselves and our societies. The current financial crisis can make us overlook the fact that it originated in a profound human crisis: the denial of the primacy of the human person! We have created new idols. The worship of the ancient golden calf (cf. Ex 32:1-35) has returned in a new and ruthless guise in the idolatry of money and the dictatorship of an impersonal economy lacking a truly human purpose. The worldwide crisis affecting finance and the economy lays bare their imbalances and, above all, their lack of real concern for human beings; man is reduced to one of his needs alone: consumption. 
56. While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation. Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules. Debt and the accumulation of interest also make it difficult for countries to realize the potential of their own economies and keep citizens from enjoying their real purchasing power. To all this we can add widespread corruption and self-serving tax evasion, which have taken on worldwide dimensions. The thirst for power and possessions knows no limits. In this system, which tends to devour everything which stands in the way of increased profits, whatever is fragile, like the environment, is defenseless before the interests of a deified market, which become the only rule.


  1. Jack unfortunately continued very skewed,lopsided reporting from you on this subject.

  2. They’re presenting 3 reasons for the litigation against the FATCA legislation in Lichtenstein(!), as follows. For clarity, I’ve numbered the reasons.

    “The appellants have claimed, in particular, that the FATCA legislation 1) contains unconstitutional references to US american tax law, 2) due to its complexity is not justicable and 3) causes
    disproportionate and unforseen costs to financial market participants.

  3. And... one would think that the US government would respect this tremendous responsibility of overseeing the world's core banking system. Yes. One would think. But that hasn't happened at all. In 2008 after Lehman Brothers failed, suddenly the world got a dose of reality.
    After an epic financial disaster which brought down some of the largest banks in the United States, suddenly the world realized that the US banking system wasn't so safe after all.
    One bank after another failed. Several had to be nationalized. Nearly all of them had to be bailed out.
    Fool me once, shame on you.
    Then in 2010, the US government passed FATCA... which mandated that every bank on the planet jump into bed with the IRS.
    They further threatened that any bank which did not comply would be kicked out of the US banking system... essentially choking off a foreign banks' ability to conduct international business.
    Fool me twice, shame on me.
    Then last year the US government went after French bank BNP Paribas, fining them a whopping $9 BILLION for doing business with countries like Iran and Cuba (though the latter is now curiously America’s BFF.)

    And naturally, if BNP didn't pay up, the US government threatened to kick them out of the US banking system. Notice a pattern?

    Fool me thrice. OK how many f**king times does the world need to be fooled before they do something about it?
    Too many times, apparently. But it’s finally starting to change.
    The world has realized that the US government has a track record of reckless irresponsibility.
    They've proven to the world that they're willing to take the sacred international banking obligation that they've been entrusted with and turn it into a weapon of intimidation.

    The US government is taking a giant, steaming dump on its last remaining competitive advantage.Having control over the global financial system is for all intents and purposes a license to print money.
    It meant that the US could create as much money as it wanted, indebt itself as much as it wanted, because there would always be strong foreign demand for dollars.
    But you can only bully the rest of the world so many times before foreigners start looking for alternatives.
    And that is happening.
    The new China International Payment System (CIPS) will be the first credible option in conventional banking to circumvent the US. And it’s coming online later this year.
    Not only is CIPS not dependent on the US dollar or the US banking system, but it also fixes a number of technological inefficiencies with the current system.

    Over the long-term, the end result will be fewer banks using the US system, resulting in a substantial decline in their use of US dollars and their ownership of US government debt.
    Think about it like this-- foreigners currently own a third of US government debt.
    If they no longer have as strong an incentive to own US dollars and start reducing their load, who’s going to pick up the slack?
    Who will the US government turn to when they need to borrow money?
    Simple. You.
    Whether you want to or not, the US government will find the most creative ways possible to ensure that you invest your money in the ‘safety and security’ of government bonds.

    Welcome to the coming capital controls.

  4. Although for long time, there was a dispute between the German tax court and the German revenue as to the legality of dividend stripping. It was incredibly common in Germany, blessed by a number of law firms and the highest tax court. Laws were constantly changed to address the loophole.

  5. All good points. But the U.S.'s relative decline cannot be attributed solely or even in any major part to citizen based taxation, FATCA or other initiatives to police citizen based taxation enacted by Congress (not the IRS or DOJ). Of course, to the extent that there is a real problem with U.S. decline, our politics are so dysfunctional that decline is inevitable for a host of larger reasons, some adverted by you.

    FYI, the ascent of other countries relative to the U.S. is a good thing. But it can be too much of a good thing from our perspective if our relative decline is accelerated by poor policies.

    Jack Townsend

  6. I agree that FATCA can't currently be blamed for any real economic decline. The problem is that as the US declines relative to the other countries in the world, FATCA could easily accelerate that decline. The penalty for not complying with FATCA is essentially loss of access to US markets. As the value of access to US markets decreases due to relative growth of other markets or a serious US recession, the cost/benefit analysis changes. As access to US markets becomes less valuable, then fewer will be willing to pay the costs and accept the risks of participating in FATCA. They simply decide to avoid the US and can then drop out of FATCA without penalty. Even today, you can have very nicely diversified without touching a US market.
    The US would be better served by joining the OECD data exchange program. The problem with that is that it would require reciprocity which the US is not willing to give. I'm sure there are vast sums of money in the US that is not declared by citizens of countries around the world. I'm sure the amount of that undeclared money would make the amounts held in Swiss banks seem insignificant in comparison.

  7. Jack,
    Your "Statistics by Offshore Financial Institutions" table is a good idea. I will be interesting to see the final totals when all of the Category 2 banks have finished.
    My question is how did you arrive at the figure of 56 for the banks in Category 2?
    It seems 106 originally joined and the articles that I have read estimate that about 80 remain although nobody is sure about the exact number.

  8. Andre,

    I should have explained that number. It is simply the number of banks that I identify elsewhere in the spreadsheet as Category 2. The government said there were 106 and has indicated that it will enter agreements with about 80. Overtime, as I get more information, my number should converge with the Government's final number.

    I think I will post next week the the banks I have identified as Category 2 and see if readers can help me flesh out the list better than I have it now.


    Jack Townsend

  9. Thanks, Andre. I agree with most of that. I suspect that, as the US refines its implementation of FATCA and the OECD refines its implementation, the two systems will converge and be the same in the key features -- including mutual reciprocity. It is just that the U.S. had to create something whole cloth. Others learned from that and perhaps built a better mousetrap. But, as we learn more in the actual implementation, the mousetraps will get better and will converge.

    Jack Townsend

  10. Good news on passport revocation: the House rejected the Senate version
    of H.R. 644 (Trade Facilitation & Trade Enforcement Act, a.k.a. the
    "customs bill") and substituted it with their own version, which passed
    in a largely party-lines vote. The House version of the bill does not include Senator Orrin Hatch's provision
    to deny new U.S. passports and revoke existing passports of people who
    have outstanding unpaid taxes or form crime fines, or who do not provide
    SSNs (it is not clear whether this would deny passports to people who
    never had SSNs in the first place).

  11. Also Section 603 of the Senate version of the Trade Preferences Extension Act (H.R.
    1295) — which would have required U.S. banks to report accounts with zero or de minimis interest
    to the Treasury, in what could have been another step towards the alleged reciprocity that Treasury mendaciously promised it would offer FATCA "partner jurisdictions" — was removed from the House version of the bill before its overwhelming passage.

    This does not mean that these provisions are dead yet. Both bills will now go to conference, where the Senate conferees will have the opportunity to pressure the House to reinsert the sections that they dropped. Separately, H.R. 1314 (the Trade Act, or colloquially the "trade promotion authority & trade adjustment assistance bill"), which contained a provision to deny the refundable portion of the child tax credit to filers who take the Foreign Earned Income Exclusion, failed to pass; it may be scheduled for another vote in a few weeks.

  12. I think it’s quite unlikely they would have used it to reinsert the
    interest-reporting provisions: Homeland politicians on either side of
    the aisle do not want to see their own banks subject to the same garbage
    which they’ve imposed on the rest of the world with FATCA, they want to
    put competing tax havens out of business so that #1 Tax Haven USA is
    the last one standing.)

  13. The Administration promised reciprocity and “Congress has now spoken, NO FATCA reciprocity.”

  14. Thanks. I see your point and an eventual merge would make sense. I think it will take some considerable political will to pass a law requiring US banks to do their part. With a Republican controlled Congress and, maybe soon, Presidency, the votes may not be there.
    On another topic, I find it curious that the DOJ/IRS would attempt to conclude the process with Category 2 banks before Category 1 banks. The Category 1 banks seem to be more culpable and may well have larger numbers of undeclared accounts in both number of accounts and total dollars. Yet they have decided to postpone working on those resolutions until next year.
    That lets another year expire under the SOL.

  15. Andre, I don't think the DOJ has postponed working on Category until

  16. Andres, I don't think DOJ has postponed resolving Category 1 banks until Category 2 resolutions are concluded. They are on different tracks being handled by different attorneys in different sections of DOJ. And, I would suspect that, for at least some of the Category 1 banks, if there is a statute of limitations problem, DOJ will request and likely receive an extension on applicable statutes of limitations. (The result of refusing such an extension is an immediate indictment that is tougher than the target thinks might be negotiated otherwise.)

    Jack Townsend

  17. As Jack is not a FATCA expert let me remind the readers here again that the FATCA legislation provides NO authority for the U.S. Treasury to enter into Intergovernmental Agreements (the IGAs). Professor Allison Christians, Jim Jatras, Congressman Bill Posey and others
    have repeatedly made this point. What Treasury appears to have done, is
    to “add on” to or “extend” EXISTING tax treaties, to include what
    eventually becomes the FATCA IGA.

  18. If a country doesn’t have a pre-existing tax treaty or tax sharing agreement then no FATCA IGA is possible.
    This allows Treasury to claim that they are NOT entering into a new
    treaty without statutory authority, but rather that they are simply
    extending a pre-existing authority.

  19. The effect of there being on comparable pre-existing treaty with the
    Vatican is that there is absolutely NO U.S. statutory authority for the
    Vatican FATCA IGA. The Vatican FATCA IGA is a public relations gesture to suggest that FATCA is truly the will of God

  20. This IGA clearly has no standing but the beauty is that it does not matter because when it comes time to report, the report will be a NIL report. Why do I say this?
    You and I can not open an account with the Vatican Bank as it exists to serve the Catholic Churches and its related employees. The Vatican pension plan is excluded.

    How many Priests with a US Place of birth overseas do you think are going to have an account with more than $50,000 in it? NONE

    It was signed so their would not be withholding on their US investments.

  21. Jack, a good read for you : Worldwide Taxation and FATCA : A Constitutional Conundrum Or The Final Piece Of The Tax Evasion Puzzle

  22. Jack, I think you are right about the Category 1 banks. I read somewhere that the DOJ plans to finish with Category 2 banks by the end of the year but probably won't resolve the cases with Category 1 until some time in 2016. I shouldn't have assumed they were doing them sequentially. Probably the Category 1 banks are just going to take longer for any number of reasons.
    The SOL expirations that I was talking about were for the account holders not the bank. As I understand the SOL rules, 2008 will be out at the end of the month. If the Category 1 banks issues aren't resolved until next year then 2009 will also be likely beyond the SOL. Given that a one year account will receive more lenient treatment because of a zero balance on the date of violation(I know some dispute this interpretation of the statute) the window of opportunity for the DOJ/IRS to assess penalties is getting smaller.
    I'm assuming that, if someone had an account for several years and closed it in 2009, then that would be the same as having a one year account after the end of the month. This would be because 2008 and before become irrelevant due to the expiration of the SOL.

  23. A few hundred years ago kings used to ask the Pope to bless their actions in an effort to give them moral authority. King Koskinen and the DOJ have received the Pope's blessing judging by the context of the Pope's speech.
    When Pope Clement refused to annul Henry VIII of England's divorce from Catherine of Aragon, Henry seized all of the Church's property in England and started the Church of England. If the Pope had refused to bless FATCA then they would only have seized 30% percent of all the income. It seems that King Koskinen and the DOJ are much more benevolent than Henry. They only want 30% and haven't chopped off any heads yet. I guess we should see that as a blessing.

  24. Andres, good points. However, there might be some incentives on the Category 1 banks to be turning over data sooner than the final resolution of their cases. Given how this as developed, I think the Swiss authorities may respond more readily to group requests perhaps of the type that were made for UBS. And, keep in mind that the really bad U.S. depositors would likely be willful for FBAR purposes and to have engaged in fraud for income tax purposes. The fraud conduct will keep the income tax statute of limitations open forever, but it is true that the FBAR SOL is ticking. Of course, the really bad actors probably did not close all accounts in 2009, but likely kept them going for some number of years thereafter, perhaps until 2012 or 2013 (on average for the really bad actors).

    Jack Townsend

  25. "zero or de minimis is key." Since current interest rates are so low, US banks can offer foreign depositors no reporting to the IRS if they keep their money in a non-interest bearing account. Long term, the money can be shifted to US real estate. Miami and NYC are two such places favored by foreign money.

  26. The European Savings Tax Directive was created and implemented before FATCA. The US could have joined, but of course that required reciprocity.

  27. Court challenge to Credit Suisse providing names of its employees to US government:


  29. This could turn into a major issue for the Swiss Bank Program. The turning over of employee, advisor and lawyer names as part of the program has been a big topic in Swiss news but there has not been much discussion in English language news. There are an estimated 400 cases pending out of 40,000 estimated affected people. I'm surprised there is not more than 400 cases pending since there is a lot of anger about turning over names on the part of employees, advisors and attorneys.
    If it is illegal to turn over names, then banks will not be able to fully comply with the Swiss Bank Program. If they turn over the names anyway then they will open themselves up to numerous lawsuits from those named. It is not an easy choice.
    Also, treaty request for enablers can then easily be challenged because the names were acquired illegally.
    Of course, it changes the cost/benefit analysis of continuing in the program. A new cost is the potential lawsuits from employees, etc. It may also give the banks an easy out by claiming that their continuation in the program would violate Swiss law and subject the bank to lawsuits. The less culpable banks may take that opportunity to get out.

  30. Pakistan’s FBR has stated that $200 billion stashed in Swiss
    banks accounts by Pakistanis cannot be recovered. It seems that FBR and
    Federal Government is unaware that on the basis of a formal request by
    Nigeria, $700 million in Swiss bank accounts belonging to corrupt late
    former head of state General Sani Abacha have been returned to Nigeria
    in 2013. This fact has been confirmed by Swiss Ambassador to Nigeria Dr
    Hans-Rudolf Hodel and Switzerland. Both Switzerland and Nigerian
    government have also agreed to request the World Bank to review use of
    all funds on welfare projects.

    Under pressure from OECD and G20, the Swiss Government decided in
    2009 to abolish distinction between tax evasion and tax fraud in
    dealings with foreign clients. International agreements signed in 2013,
    sponsored by OECD, approved by Swiss Parliament require Swiss banks to
    align banking practices with those of other countries and in effect end
    special secrecy that clients of Swiss banks enjoyed in the past. No
    American citizen can open a Swiss bank account unless he declares in a
    signed legal document they have no outstanding financial obligation to
    IRS. In 2013, Swiss Parliament approved a law that allows Swiss banks to
    cooperate with US tax authorities as specified in FACTA.

    If Pakistan, its executive and FBR have political will to recover tax
    evasion by Pakistanis who hold over $200 billion in Swiss accounts, the
    least that can be recovered is tax evaded which comes to between $50
    billion at 25 per cent and $60 billion at 30 per cent tax rate. But this
    can only occur if tax recovery is on agenda and priority of our
    establishment, bureaucracy and political elite of Pakistan.
    Unfortunately, the sad bitter reality is that nobody wants to set this
    precedent of tax recovery. Almost one-third of all worldwide funds held
    outside their country of origin amounting to $2.6 trillion are in Swiss
    bank accounts, mostly black money belonging to corrupt politicians, arms
    and ammunition dealers, dictators, mobsters, drug dealers, tax evading
    traders and terrorists.

  31. $CS : “The court has decided on an individual case and has not determined that
    the cooperation under the authorization by the Swiss Federal Council is
    generally illegal.”

    The Geneva ruling is the first by a court that concretely determines the transfer of personal employee details was illegal

  32. I'd like to make some constructive criticism for all sides:

    Many commenters on this website seem to assume that US residents are
    patriotic "homelanders" who support CBT. I live in the US and I can tell
    you that this is not true. The vast majority of Americans don't even
    know that CBT exists. When I inform them, I get various responses: some
    say that the US should not tax foreign income or demand information on
    foreign assets because it's none of their business; many sympathize with
    the problems of Americans abroad (complex paperwork, fear of penalties,
    financial restrictions); some try to justify CBT with consular services
    or the right of return, but when I reply that these things are not
    funded by taxes (or don't actually cost anything, in the case of the
    right of return), they concede; only a few invoke patriotism, but as a

    Many here also seem to believe that "homelanders" see Americans abroad
    as "tax cheats". I don't know where you got this idea. I've only seen
    this as a brief mention by a US politician from the 19th century, and I
    don't think anyone else believes that. I've certainly never heard anyone
    say that here. US residents correctly assume that people move abroad
    for various reasons. Many of them have family or friends who lived or
    are living abroad.

    Condemning US patriotism while praising Canada is inconsistent and
    alienates those who are not from Canada. CBT applies equally to all
    countries outside the US, and the Canadian government has done the same
    as the rest of the world regarding FATCA, it's not a special case. I've
    also seen some commenters focus too much on issues in specific countries
    such as the various 4-letter Canadian accounts or Australian
    superannuation. People outside these countries have absolutely no idea
    what these things are. The problem is CBT in principle, not the details
    of how it affects specific investments.

    Some people, like Republicans Overseas, are focusing way too much on
    FATCA. Blocking or repealing FATCA is very unlikely, and even in that
    case it would not solve the myriad other problems caused by CBT.

    Expatriate lobbying groups seem to be ridiculously afraid that the US
    government will not pay attention to their demands if it looks like they
    don't love the US. Seriously? Michael Kirsch cleverly pointed out the
    inconsistency of identifying yourself as part of US society while
    requesting to be taxed as someone from outside that society. It would
    make much more sense if they just stated the truth: they are actually
    more attached to the countries where they live, but want to keep US
    citizenship simply for the peace of mind that they could return to the
    US one day. Maybe the CBT debate should be centered on whether the right
    of return constitutes membership in the society or merely the
    eligibility for membership.

  33. According to Bank Sparhafen has entered the Swiss Bank Program and agreed to pay a $1.81 fine. Here is the link to the article in German:
    They made the announcement on Wednesday evening according to the article. I haven't seen any mention of this anywhere else. The article doesn't say much of interest other than the penalty amount.
    Is it no longer news when a Swiss Bank joins the program?

  34. Andre,

    Thanks for the information and the link. I think DOJ will be posting a press release on this. Perhaps, given the number still to go, it will do a periodic -- say weekly -- announcement with multiple banks in each announcement. Before posting on it, I will see if anything comes out today.

    Jack Townsend


  36. Well thought out comments.
    I would add that not only do almost all countries practice residence-based taxation, but so do the US states. Though I have the right to reside in the state where I was born and other states where I've lived, as well as states I've never set foot in, the moment I mover from one US state to another I am subject to the new state's taxes, driver licensing, voting, etc. States seem to be able to administer this effectively. There does not seem to be a big problem of people falsely claiming residency in another state in order to evade taxes.
    Likewise, the IRS seems to be able to effectively aspply the foreign earned (salary) income credit.
    So it would not seem to be an administrative problem to deal with residence based taxation.


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