August 14

FATCA: will Europe pay the price for one-sided U.S. financial information demands?

It seems that “automatic exchange of information” (AEOI) is all the fashion at the European Commission as a means to combat “revenue losses incurred due to tax fraudsters and evaders.” To that end, a recently proposed Council Directive would base an AEOI “pilot action” on model intergovernmental agreements (IGAs) drafted pursuant to a “joint statement” last year by the U.S. Treasury Department and five EU governments for “reciprocal” implementation of the U.S. “Foreign Account Tax Compliance Act” (FATCA).

As an American, I cannot tell Europeans they should not base their tax policy on AEOI or the FATCA model. But if the Commission or EU Member States believe that the U.S. will actually provide “reciprocity” for the kind of information they are committing to deliver to Washington, they should reconsider their assumptions.

Under the FATCA IGAs, European governments commit to require their domestic financial institutions to report the assets of all “U.S. Persons,” first to that government’s own tax service, and then to transfer it to the U.S. Internal Revenue Service (IRS). For example, under a law recently approved by the parliament of the United Kingdom (the first country to sign an IGA), HM Revenue & Customs commits explicitly to impose the American FATCA law on British institutions. The costs of regulatory implementation by HMRC would fall on British taxpayers. In turn, UK financial institutions (and their customers) would bear hundreds of millions of pounds in costs for collecting the information for transfer to the IRS. The direct revenue benefit to the Exchequer? Zero. The same will take place in each non-U.S. “FATCA partner” country, as the 2012 “joint statement” euphemistically calls them. (Worldwide, estimated FATCA compliance costs run to $1 to 2 trillion in order to “recover” revenues of less than $1 billion per year – enough to fund the U.S. federal government for about two hours.)

What is the U.S. obligated to provide in return? Nothing, as it happens. The IGAs, which are nowhere authorized or even mentioned in FATCA, have no clear status in American law. They are not simple treaty-based “interpretive” agreements, nor are they treaty amendments submitted to the U.S. Senate for advice or consent, or to the full Congress for enactment in American domestic law. In essence, this means the IGA has the force of law for the non-U.S. “partner” but not for the U.S. I have first-hand knowledge of at least one government that specifically told Treasury they would consider an IGA only if it took the form of a treaty protocol, with Senate approval, so they could be sure it would bind the U.S. as well. Treasury flatly refused.

Legalities aside, as a practical matter “FATCA partners” are unlikely to receive anything in the way of “reciprocal” information from the U.S., despite Treasury’s promises of limited non-resident alien (NRA) bank interest information (under the “reciprocal” IGA), as well as eventual “equivalent levels of reciprocal automatic information exchange.” Even the limited NRA interest reporting is far from a sure thing, under threat from a lawsuit by Texas and Florida banks and from longstanding bipartisan opposition in Congress.

As for “equivalent levels” to what the “partner” has to provide the U.S.: that simply is unattainable. Even Treasury admits it can’t issue regulations to force American financial institutions (which, unlike their non-U.S. counterparts, have a say in whether they will be subject to crushing FATCA-like compliance costs) to provide “equivalent” data. In April, Treasury requested such authority as part of the Fiscal Year 2014 Budget, where it was blocked by Bill Posey (R-Florida), a powerful Member of the Republican-held House of Representatives. Meanwhile, in May FATCA repeal legislation (S. 887) was introduced in the Senate by 2016 presidential prospect Senator Rand Paul (R-Kentucky) and is an item for inclusion in a tax reform package expected in 2014 or 2015. The fact that the United States does not have a parliamentary governmental structure – unlike European finance ministries, the Treasury Department cannot speak with the authority of a “parliamentary majority” – is not always fully appreciated abroad.

Even proponents admit that enforcing FATCA – which doesn’t contain a single provision targeting tax evasion activity – as a one-sided, extraterritorial demand for millions of people’s private information, backed up with a draconian 30 percent sanction for noncompliance, was “wholly unachievable.” The pretense of U.S. “reciprocity” is just bait for hooking the real purpose of the IGAs: bypassing non-U.S. human rights, data security, and other protections that, as conceded in the April Budget request, “prevent foreign financial institutions from complying” with FATCA. This is confirmed in the British context by HMRC: “Current law does not allow financial institutions to pass FATCA information either directly to the US or to HMRC on a voluntary basis, nor does it enable HMRC to require it.” If European governments consent to act as agents of the IRS, persons whose legal protections would need to be brushed aside include an unknown number of EU citizens: “accidental Americans,” dual citizens, and family members. (Given concerns about covert information-gathering by the U.S. National Security Agency, it’s fair to ask whether the motives behind FATCA are limited to tax enforcement.)

In the end, if Europeans want to adopt the FATCA model among themselves in the form of AEOI, that’s their choice and they would be perfectly free to do it. But if so, it should be with eyes wide open. With respect to the United States it would be an invasive, costly, and strictly nonreciprocal arrangement.

James George Jatras is a Washington-based government and media relations specialist, and former U.S. Senate staffer and U.S. diplomat. He manages the website www.RepealFATCA.com .