The Foreign Account Tax Compliance Act (FATCA) is an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts.Under FATCA, U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS. This reporting will be made on Form 8938, which taxpayers attach to their federal income tax return, starting this tax filing season. In addition, FATCA will require foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interes.

At a recent hearing in Washington on May 15, financial and banking stakeholders and their legal representatives from around the world appeared before the Service to urge that the Service limit the scope and application of proposed regulations making them less complex and delaying the effective dates currently in placed. The 22 witnesses gave testimony (see Tax Notes Doc. 2012-10409) criticizing the documentary burdens, effective dates, the risk-based approach of compliance, conflicts with local law, and the complex nature of the provisions and regulations.

Comments on Effective Dates

Under the proposed regulations, U.S. financial institutions must document new accounts beginning on January 1, 2013. Participating FFIs must begin documenting new accounts on July 1, 2013. The testimony repeatedly asked for the foreign financial institution (“FFI”) reporting of new accounts be delayed until at least 2014. Some complained that the banks they represent cannot even “begin implementation in earnest until the regulations, intergovernmental agreements, and other forms are finalized”. A representative of the Institute of International Bankers said much of the burden would fall on the back-office staff and many of those employees do not speak English and may struggle to parse and implement FATCA's complex rules. Perhaps the response should have been given of “welcome to our world of IRS regulatory enforcement of international tax evasion and the premium placed on transparency of ownership”. Perhaps that response was not needed. In frustration, such witness concluded that "it simply will not be possible for financial institutions to implement new account documentation processes by 2013.”

Comments on Documentation Burdens

There was near universal awareness on the part of the witness that the FATCA requirements go well beyond many foreign countries’ anti-money-laundering (AML) and “know-your-customer” (KYC) provisions. Testimony in this area recognized that under the proposed regulations, an FFI will be required to review information provided for new individual accounts in accordance with the AML and KYC rules, but if the review reveals indicia suggesting that the account belongs to a U.S. person, the FFI must undertake additional steps. One witness appearing on behalf of the Swiss Bankers Association testified that in his organization’s view there are better ways to achieve effective tax administration and anti-tax-evasion measures than imposing reporting requirements "on every bank in the world that may hold an account for a U.S. citizen or green card holder.

Other problems in this area were that FATCA and the proposed regualtions were considered to be in  conflict with established business practices. For example, the Japan Securities Dealers Association’s representative testified that banks in that country would hesitate to ask clients for documents explaining circumstances such as the abandonment of U.S. citizenship by individuals born in the United States. Such questions are too “private or delicate” and is  not something Japanese financial institutions could ask . . . their customers," .

A witness for Canadian banks testified that under Canadian AML/KYC rules, a Canadian social insurance number card is widely used to open an account. However, for FATCA purposes, the card is not an acceptable form of documentation because it does not have an address. The same is true, in effect in Australia, where passports  are usually acceptable forms of documentation for AML/KYC purposes, but typically do not have the holder's address either.

A common theme expressed was that the proposed regulation would also unfairly benefit U.S. companies over non-U.S. companies in the online banking industry because the do not contain an exception for proving documentation by third parties.  Individuals opening an online account have to rely on third parties to prove their identity.

Local Law Conflicts

A representative speaking on behalf of the Federation of Brazilian Banks, said Brazilian banks are under extensive reporting requirements for reporting deposit holder are already obligated under local law to report each bank account to the government, including the current and previous year's balance and income earned as of December 31 of each year. So far so good. However, separating out U.S. account holders would allegedly violate Brazilian law making it nearly impossible for Brazil banks to comply with FATCA. The suggestion was made that the US and Brazil enter into a TIEA (tax information exchange agreement) in addressing this problem. Other witnesses and written testimony echoed the same concern. The success of FATCA will ultimately depend on foreign governments complying with the FFI reporting requirements. Perhaps there will be a “model” agreement on FATCA cooperation as previously reported.

Stay tuned for further developments in this area. This issue will test the Obama’s adminstration’s ability to bring about meaningful tax transparency to reduce the level of tax evasion that has plagued the United States and other G-20 members as well as other countries through the use of off-shore banking and bank secrecy laws.