Tuesday, March 18, 2014

Article on FATCA as New International Standard (3/18/14)

Tax Notes has published a new article on FATCA.  Joshua D. Blank and Ruth Mason, Exporting FATCA, 142 Tax Notes 1245 (Mar. 17, 2014).  Professors Blank and Mason are at NYU Law and UVA Law.  The earlier draft version at SSRN is here.  The following is the SSRN summary of the article:
The Foreign Account Tax Compliance Act (FATCA) represents a powerful response by the United States to flagrant offshore tax evasion. Although the new reporting regime has been criticized as unilateral and extraterritorial, this short article, prepared for a symposium hosted by Pepperdine Law Review, shows that multilateralism and cooperation so far have been the keys to implementing FATCA. In addition to spurring bilateral Intergovernmental Agreements (IGAs) to implement FATCA, and copycat legislation in other jurisdictions, for many countries, the FATCA reporting requirements represent an aspirational new global standard for automatic exchange of information – one that would supplement, if not replace, information exchange on request.
The following are excerpts (footnotes omitted) from the article as published in Tax Notes (haven't compared to the draft which I link above).  I present them in the outline format of the article, omitting most of the text (omissions shown by * * * *) and sometimes adding information shown by brackets [ ].

A. Introduction

* * * *

B. The Rise of FATCA

* * * *

1. Background. 

* * * *

2. FATCA. 

* * * *

3. Criticisms [of FATCA]

[Those who don't like FATCA will find some reinforcement in this succinct summary of criticisms]

C. From Unilateralism to Multilateralism

While complaints about the unilateralism and extraterritoriality of FATCA are not without merit, FATCA has enhanced multilateral cooperation in combating tax evasion, and it has spawned similar legislation and treaties in other jurisdictions.

1. Model IGAs. 

* * * *

2. Son of FATCA. 

[This discusses other countries' FATCA-like legislation or treaties.]

3. FATCA as new global standard. 

In addition to the jurisdictions emulating FATCA, many jurisdictions view FATCA as an opportunity to establish a global standard for automatic information exchange. For example, in discussing its new information sharing agreements with its crown dependencies, the U.K. government stated that:

the U.K. was quick to see the potential . . . to embed a new international standard in the exchange of information based around the FATCA model. This would provide a step change in the ability of the international community to tackle tax evasion, while minimizing costs for governments and business (who are already investing in the systems and processes necessary to comply with the U.S. FATCA legislation and the subsequent intergovernmental agreements to implement it).

The United Kingdom announced that, in addition to its crown dependencies, it would seek to negotiate similar automatic information exchange agreements with other jurisdictions, and that these contemplated agreements, along with its own IGA with the United States, "all form part of a drive to embed a new single international standard in the automatic exchange of tax information." Likewise, in May 2013, 16 EU member states called for a "new global standard for automatic exchange of information to tackle tax evasion, based on the U.S. FATCA legislation." Most importantly, in early 2014, the OECD announced, and the G20 approved, a new Common Reporting and Due Diligence Standard for use by countries wishing to exchange information automatically. The OECD describes this standard as drawing "extensively on the intergovernmental approach to implementing FATCA . . . with a view maximizing efficiency and reducing cost for financial institutions."

4. Multilateral information exchange. 

FATCA also seems to have precipitated or accelerated efforts at multilateral information exchange. For example, the G-5 announced that they will exchange information multilaterally based on the U.S. model IGA. Likewise, official statements from the EU cast FATCA as providing "a unique opportunity to move from a series of bilateral agreements to a multilateral system." Indeed, unilateral FATCA ultimately may help improve the leaky EU savings directive. Veto-holding EU member states attempting to preserve what was left of banking secrecy in their jurisdictions have blocked amendments to the directive. Members of the EU Parliament, even when they vehemently oppose FATCA, seem to agree that FATCA has galvanized the EU into action. For example, at a public parliamentary hearing on FATCA, European Parliament member Sophia in 't Veld (Netherlands) stated, "The fact that we're welcoming the application of third country law on our territory is only a reflection of the weakness of the European Union. We only have ourselves to blame because we were unable to adopt our own policies."

If FATCA represents a new global standard for information exchange, that standardization would mitigate the concern by banking associations that they are being asked to shoulder an extraordinary administrative burden concerning only Americans. If every country adopted a FATCA-like regime, FFIs would no longer be looking for American needles in a global haystack. Standardization according to the FATCA model would mitigate FFIs' concerns that they could be subject to a variety of conflicting reporting requirements imposed by different states. Likewise, IGAs and attendant legislative changes in FATCA partner countries resolve conflicts between FFIs' obligations under FATCA and their obligations under local law. In short, multilateralism and cooperation may be the key to successful implementation of what has been criticized as unilateral and extraterritorial U.S. legislation.

D. Unanswered Questions

* * * *

E. Conclusion

Fiscal crisis emboldened the United States to use access to its capital markets as an enforcement mechanism for securing information about domestic taxpayers from foreign institutions. And, in turn, the U.S. passage of FATCA emboldened some of our trading partners to rally behind a new standard of automatic information exchange. Thus, the initial outraged reactions to FATCA among private parties and government officials seem to be shifting to acquiescence by the FFIs, and at least some government officials view FATCA as an opportunity to strengthen their own offshore enforcement.


  1. Jack every bank operates under certain "risk parameters" not just PB and IB etc.
    What has happend to $UBS and $CS is the cost of doing business with HNW or offshore clients in general. Nothing more - nothing less..... you are loosing the perspective for the "Big Picture" .
    May I remind you that $BAC,$JPM,$WFC, $C, $GS have amassed nearly $100 billion dollars in fines in over 81 settlements in less than 5 years.
    What is or was for swiss banks the DOJ OVDP initiative is and was for their US counterparts the financial settlements and penalties related to US mortgage activities.
    Let me assure you that the DOJ will settle with all 14 swiss banks and that no indictment will be obtained . Nobody in CH is currently afraid of what "statement" the DOJ might or might not make.

  2. uscitizenshipnightmareMarch 18, 2014 at 12:35 PM

    FATCA is poorly constructed law, but one that is here to stay, not least because foreign governments see it as a step in the right direction towards limiting offshore tax evasion. Unfortunately (although understandably), a lot of the US expat effort seems to be directed towards repealing FATCA. It is an easy target but even if it were repealed, the underlying filing obligations, FBAR penalties, taxes on phantom income, PFIC nightmares and double taxation would still remain. A FATCA repeal might make it harder for the IRS to catch non-compliant ex-pats, but it is not going to ameliorate the pain if they are caught or have to go into voluntary disclosure. A real effort to bring people into compliance without confiscating their savings would probably achieve the desired tax incomes and create a lot of grateful expats and accidental Americans while still giving the IRS the opportunity to punish true tax evaders (most of whom live in the US).

  3. Obama Tax Scheme Could Destabilize Banks, Spark Economic Crisis’

    The Obama administration has refused to perform (or at least release) any sort of cost-benefit analysis of its new tax reporting scheme, labeled “DATCA lite” by some analysts, as it paves the way for even greater FATCA-linked domestic data collection and sharing. Independent experts, though, are warning that the plan could result in potentially
    tens or even hundreds of billions worth of foreign deposits fleeing from U.S. institutions….”……

    …”“We see no principled basis on which to require that financial institutions based in other countries collect and provide us with information on U.S. taxpayers, if we take the position that our own institutions should be exempt from similar requirements,” explained
    Treasury Acting Assistant Secretary for Tax Policy Emily McMahon in a 2012 speech. “To the contrary, we believe that it will be critical to the success of our efforts to implement FATCA that we are able to reciprocate.”
    Of course, spying on people and sharing their deeply private information without a warrant or even probable cause is unlawful in many countries around the world — in the United States, the Fourth Amendment to the U.S. Constitution was supposed to protect Americans from such machinations. To get around those obstacles in the supposed hunt for an
    extra billion or so dollars of tax revenue every year, the Obama administration is signing up foreign governments for what are known as “inter-governmental agreements,” or IGAs.

    Once the unconstitutional pseudo-treaties are signed — the U.S. Senate gets no opportunity to offer its consent on the deals, despite what the Constitution requires — foreign governments are expected to violate the privacy of account holders in their jurisdictions and become de facto agents of the IRS. Information on so-called “U.S. persons” is
    to be collected and sent to the Treasury. In return, the Obama administration plans to force U.S. banks to “reciprocate” — or put another way, violate the financial privacy of foreigners with accounts in the United States on behalf of foreign IGA signatory governments….”…..


  4. uscitizenshipnightmareMarch 18, 2014 at 12:43 PM

    Does an indictment really matter to a Swiss bank? Did it matter to Wegelin? Obviously, it destroyed the brand of one of Switzerland's oldest private banks, but from what I could tell, they simply transferred assets and sold their business to Raffeissen. Basler Kantonalbank CEO had this to say about US investigations: "Neither the bank itself nor any of the individual employees are facing an indictment. A worse-case scenario in the sense of an indictment would limit our business, but it would not put the financial security of the bank in question," said Basler Kantonalbank chief executive Hans Rudolf Matter.

  5. Thanks Jack. Always interested to see what TAX NOTEs has to say, seeing the publisher is one of the Biggest FATCA enthusiast and dare I say, apologist for FATCA unintended negative consequences and impacts...

    Yes, DATCA lite, and GATCA are the Rosemary's Baby of FATCA insemination. Can't NOT see how this is good for the global economy, but I do understand that the FATCA Compliance Complex loves the billing hours, as the Hire Act, was definitely the Tax Practitioner and CPA full employment Act. :)

    For another admittedly conservative view that you probably will NOT appreciate, this was just published too.

    Obama Tax Scheme Could Destabilize Banks, Spark Economic Crisis


    (However, NOTE: even Rep. Debbie Wasserman Schultz, the chair of the Democratic National Committee, joined with every other member of Florida’s congressional delegation in asking the administration to withdraw the [DATCA lite] rule.)

    Also, in my continuing education on DATCA and how our so called Democratic process works, I just received this analysis written back in 2004...

    Mercatus Center at George Mason University



    Treasury had tried before using the reciprocity aspect of FATCA IGAs (going back to 2002) to impose a DATCA regime, but didn’t happen until it had an Administration in power to its liking. I didn’t realize this history, until reading this. It just goes to show, that bad ideas have a long gestation period, and vigilance against them can NEVER be relaxed. They bide their time, waiting for the favorable moment to impose. Yes, and in non partisan manner, it happens on both sides of the aisle! :)

    UBS offshore Tax evasion scandal and the birth of FATCA obviously (at least to me) were the“Shock Doctrine” moments that gave the Treasury its opportunity again, to impose 'DATCA lite' unilaterally using their interpretation of ‘regulatory authority’ without regard to the will of Congress or any cost benefit analysis. It is ideologically driven.

    I quote...

    "One of the criticisms lodged against using Federal Register page counts as a proxy for regulatory burden holds that many pages can be consumed in the process of deregulation, while only a handful of pages may be required to impose a particularly costly rule.The latter instance is clearly illustrated by the IRS’s proposed rule to require the reporting of deposit interest paid to nonresident alien (NRA) depositors of U.S. depositories. I hold this conclusion despite the IRS’s unsupported assertion in the scant (4 page) documentation of its proposed rule that the “proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866.” (p. 50387).

    Although proposed in 2002, and the comment period has long since passed, the NRA deposit interest reporting rule has not been finalized; however, the possibility that it may be implemented provides the motivation for this study. The analysis that follows confines itself to the likely economic consequences of the rule, and leaves the legal and political analysis of the rule to others.2 For ease of exposition, I summarize my analysis of the rule’s potential economic effects into primary effects, secondary effects, and other likely consequences."

    You can read the rest of the analysis here...


  6. ....."giving the IRS the opportunity to punish true tax evaders (most of whom live in the US)......."
    > 95% to be exact !

  7. An indictment is a deathknell for a bank. Other institutions will refuse to do business with it. It's auditors will have convulsions. I am unaware of any financial institution that has survived an indictment.

    With that said, the DOJ knows that an indictment is a death sentence. There is no arguing that the DOJ holds the power to destroy whatever institution it sets its sights upon.

    Knowing that it has that power, the DOJ has admirably restrained itself. Even in the UBS case, the judge asked the DOJ how far it wanted to push the matter of enforcing the John Doe summons and wanted the government to make a conscious decision about the consequences of it's actions. The Arthur Anderson case is the quintessential example to avoid.

    The DOJ has a lot of weapons at its disposal. All of the 14 Category one banks remain operative, because the US has made a decision not to fully flex it's muscles. Of course, there are possible negative repercussions should the DOJ exercise all of its muscle. There could be a trade war, a political standoff, or retaliation. There could also be the loss of hundreds of thousands of US jobs.

    It is hard to believe that Dugan and Credit Suisse would have appeared at the Senate panel's investigative hearing, without a deal on the table. Credit Suisse would do anything it could to settle with the DOJ. The settlement hurtles are most likely based upon intergovernmental disagreements, which are exasperated by the US Senate's failure to ratify the most recent treaty with Switzerland.

    In any event, do not underestimate the consequences of an indictment.

  8. In line with the point above that the damage/punishment inflicted on the offending banks needs to be more than just nuisance damage/punishment, See Dominic Elliott, Tax-haven fines’ worst toll? Swiss banks’ reputations (The Globe and Mail 3/13/14), making the point that the financial punishments while significant relative to the business generated by this activity and each bank's overall business activity and balance sheets. The larger point is that, while chasing after these dollars (not significant to the banks), they put not only their freedom at stake (in the case of bank enablers) and their wealth at risk (because of the fines and the transaction costs of dealing with investigations), the banks put their reputations at risk. That will likely be the greatest financial cost to the banks.

    There article is here: http://www.theglobeandmail.com/globe-investor/tax-haven-fines-worst-toll-swiss-banks-reputations/article17481553/?cmpid=rss1

  9. Jack, the idea that the swiss banks put their reputation at risk is the same that $C, $GS, $JPM, $MS, $WFC and $BAC have lost theirs during the last 5 years with nearly $100 billion in fines and settlements.
    I would even go further and say that the swiss banks will have survived
    the DOJ and SEC far better than their US counterparts !!


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