FATCA and U.S. Influence on International Tax Law

Over the last decades, a number of initiatives taken by various U.S. administrations on both sides of the aisle have raised concerns about the actual legality of the extraterritoriality attached to laws imposed by the U.S. on other jurisdictions around the world, namely through the Foreign Account Tax Compliance Act.

In law school, we were taught that tax laws could not extend beyond the borders of the taxation authorities. The territoriality of tax laws is confirmed by the literature.

Right now, however, Switzerland is confronted with an “emergency” law submitted to its Parliament to accommodate Uncle Sam disclosure requirements. The justification is: if you don’t do it, we will ban your banks from operating in the United States. The Swiss Parliament refused the emergency. Already threatening noises of withdrawal of licenses are coming from Washington, D.C.

U.S. APPLIES TAX LAWS UNIVERSALLY

The United States is the only country that taxes its nationals on a worldwide basis, at least individual taxpayers. The Ways and Means Committee of the U.S. Congress recently questioned the idea that the United States can tax its citizens worldwide.

Interestingly, it is probably the strongest incentive for U.S. firms operating abroad to recruit local staff rather than U.S. tax residents. The cost of hiring U.S. taxpayers abroad can be twice as costly as hiring locally.

FATCA BASICS

FATCA is described by the IRS as an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts and includes two main features:

1. It requires U.S. taxpayers to declare the existence of their foreign accounts, wherever they are in the world, if they reach $50,000 for singles and $100,000 for married couples. This is in addition to the Report of Foreign Bank and Financial Accounts (FBAR) that requires a reporting to the U.S. Treasury under the Bank Secrecy Act for balances valued at $10,000 and up.

2. The IRS requires foreign banks to provide information on such accounts if the account holder is a U.S. national or a U.S. resident. They require a “foreign financial institution” (“FFI”) to enter into, and to comply with, a reporting and withholding agreement (“FFI Agreement”) with the IRS with respect to U.S. account holders. An FFI that enters into an FFI Agreement is referred to as a “Participating FFI.” An FFI that does not enter into an FFI Agreement (referred to as a “Non-Participating FFI”) would be subject to a 30% gross withholding tax unless it is otherwise exempted from the FATCA regime.

Negotiations are managed country by country by IRS officials, at their discretion. And this is just against the individual U.S. taxpayers. The IRS does not intend to tax corporate revenues abroad.

In a way, foreign banks have become tax collectors for Uncle Sam. The IRS is effectively recruiting tax informants who, at their cost and expenses, need to provide ways and means to comply and change their systems.

As a result, international banks are beginning to refuse to open accounts for U.S. residents or nationals. It has become too onerous for them to keep accounts for U.S. residents.

The cost burden for countries like the UK is not insignificant: it is estimated that the cost for UK business over the first five years will be $1.7-3.2 billion, running thereafter at an annual cost of $80-150 million.

This will also affect Americans working outside of the United States who are not going to be able to use local banking facilities. The opposition to FATCA is growing in Europe and, after pretending that it did not matter, some European governments are now looking at a European version of FATCA. If it were effectively imposed it would make sure that U.S. banks will report all revenues of European taxpayers to the authorities of the taxpayer. This could threaten a substantial part of the international private banking or brokerage operations of U.S. financial institutions, a multi-billion-dollar business for large U.S. banks.

RETHINKING U.S. REACH ON INTERNATIONAL TAX LAW

If all countries decide that their citizens will be taxed on a worldwide basis, as the United States does, working abroad will become increasingly onerous. The United States has to ask itself the question of whether its actions are legitimate and question its objectives and the ways it goes about achieving them. But it is questionable to see Uncle Sam recruiting for free tax informants around the world.

WHERE THE MONEY COMES FROM

The UK continues to account for the largest chunk of foreign money lying with Swiss banks, shows an analysis of annual data released by Swiss National Bank (SNB) on all the banks present in the European country.

Among the top-ten jurisdictions in terms of source of money with Swiss banks, the UK is now followed by the U.S., West Indies, Jersey, Guernsey, Germany, France, Bahamas, Cayman Islands and Hong Kong.

The funds owed by the Swiss banks to their UK clients stood at 295 billion Swiss francs, accounting for about 22% of total such funds (over 1.4 trillion Swiss francs).

The major countries ranked among the top-25 include include Singapore, Japan, Italy, Australia, Russia, Netherlands, Saudi Arabia and Cyprus.

As per SNB data, the Swiss banks saw a decline in funds belonging to most of their foreign clients during 2012 and the funds belonging to their domestic clients surpassed those of overseas ones for the first time in their history.

A global movement against the famed secrecy wall of Switzerland banking system is beginning to make it unattractive for their global clients.

The data has been released at a time when Switzerland is facing growing pressure from the U.S. and other countries to share the foreign client details, while its own lawmakers are resisting such measures.

For clients across the world, total funds in Swiss banks stood at a record high level of $2.6 trillion at the end of 2007, but has fallen by over $1 trillion since then.