Problems with FATCA
An expansive piece published by Reuven Avi-Yonah in the American Prospect has highlighted some issues with the current worldwide international tax system as well as suggest ideas for reform. Singapore, Ireland and Luxembourg are three jurisdictions that are mentioned as prime places where U.S. income is shifted to by corporations. Ireland’s 12.5% tax rate, which is a stark contrast to a rate of 35% in the U.S., is highlighted as a key reason for why U.S. corporations decide to base in this location. The Foreign Accountant Tax Compliance Act (FATCA) is described as having lead to “real developments” due to the fact that the Offshore Voluntary Disclosure Program which is a by-product of FATCA has netted more than $6 billion in taxes. Despite this, Avi-Yonah progresses to mention a key flaw with FATCA in the fact that it can be wholly avoided by using foreign banks with no U.S. exposure. We believe that this is an important evaluation which should be watched carefully by the U.S. government as they may notice an increase in the amount of US citizens and corporations switching to use foreign banks with no connection to the U.S.
The article states:
"FATCA has real teeth, as the chorus of complaints by foreign banks and their governments shows. It also led to real developments. The Offshore Voluntary Disclosure Program, which has netted more than $6 billion in taxes, is a child of FATCA. So are more than 100 “intergovernmental agreements” (IGAs) that the U.S. Treasury has negotiated with various countries. Under the IGAs, the foreign banks can disclose the information about U.S. account holders to their government, which can turn it over to the IRS. This avoids legal problems from the banks dealing directly with the IRS, which is illegal in most countries. Even Switzerland has signed an IGA.
In addition, more than 80 countries (including the U.S.) have signed a Multilateral Agreement on Administrative Assistance in Tax Matters (MAATM), which envisages automatic exchange of tax information among the signatories, using a common reporting standard developed under FATCA.
But problems remain. First, FATCA itself is vulnerable because it can be avoided by using a foreign bank with no U.S. exposure. In addition, its disclosure obligations apply only to larger accounts and can be avoided by tax cheats opening smaller accounts at multiple banks. So secret offshore accounts are still possible, although the cost of tax evasion and the risk of discovery have increased. Second, these agreements depend on compliance by long-standing tax havens, an outcome that is far from certain. In addition, the IGAs require reciprocity from the U.S., and while U.S. regulations that require U.S. banks to collect the information for reciprocal exchanges have prevailed in initial court proceedings, they are still subject to vigorous judicial challenges.
Third, the U.S. has signed, but not ratified, MAATM, and it seems unlikely that it can be ratified in a Republican-controlled Senate.
Finally, the entire edifice rests on an uncertain foundation. For exchange of information to work, every single tax haven needs to cooperate, because otherwise the funds will flow to the non-cooperating havens. Total tax haven cooperation seems unlikely, to say the least, absent stiff sanctions that go beyond the U.S. 30 percent FATCA tax, such as a mechanism to cut off an offending tax haven’s banks from the international wire-transfer system. In the past, world leaders have threatened sanctions against uncooperative tax havens, but never actually imposed them. Economists like to imagine universal solutions to the tax-evasion problem (such as the global tax on wealth proposed by Thomas Piketty, or the universal registry of financial assets advocated by Gabriel Zucman), but in the world we have, such solutions are utopian. Automatic universal exchange of information is likewise a nice ideal that may be implausible in practice."
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