On Friday (note: March 28) Ambassador Mandell and Finance Minister Gramegna signed The Foreign Account Tax Compliance Act, or FATCA, an agreement which introduces reporting requirements for foreign banks with respect to certain accounts held by U.S. taxpayers. This reporting will help increase transparency and reduce tax evasion. According to Ambassador Mandell, “By working together to detect, deter and discourage offshore tax abuses through increased transparency and enhanced reporting, we can help to build a stronger, more stable, and more accountable global financial system.”
For Ambassador Mandell, even if this FATCA thing is providential circumstance, it is the fulfillment of a promise during the Congressional hearing for his nomination. This was reported at the time: “Mandell told senators that, if confirmed, he plans to focus on increasing U.S. exports and on making Luxembourg’s banking industry more transparent.”
As of April 2013, Luxembourg’s government has chosen FACTA model I which will provide automatic exchange of information between the Luxembourg and American fiscal authorities on bank accounts held in Luxembourg by citizens and residents of the United States. Model II would have FFIs report individually to the IRS.
The Foreign Account Taxation Act (FATCA) was enacted in 2010 by Congress as part of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA requires Foreign Financial Institutions (FFIs) to provide the IRS with information about financial accounts held by U.S taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
In order to avoid withholding under FATCA, a participating FFI will have to enter into an agreement with the IRS to:
- Identify U.S. accounts;
- Report certain information to the IRS regarding U.S accounts; and
- Withhold a 30 percent tax on certain U.S. connected payments to non-participating FFIs and account holders who are unwilling to provide the required information. (Source: Truth Technologies).
Impact on banking secrecy jurisdictions and practices:
There is some irony in this adherence to FATCA for banks in several banking secrecy jurisdictions, such as Luxembourg and Switzerland. After the introduction of the “Qualified Intermediary”, the precursor of FATCA. Many Luxembourg and Swiss banks denied opening accounts to US citizens and residents, that is, US taxpayers, just to escape the uncertainties and risks to have that kind of customer. I had a negligible checking account with Caisse Rurale, that was opened to me in 1953, when all schoolchildren got such an account compliments of the bank with one hundred Luxembourg Franks as a gift deposited on it. I guess the cost of acquiring customers. A couple of years ago it was forcefully closed by Caisse Rurale, because in the meantime I had also become a US taxpayer. That scenario has obviously repeated itself thousands of time, including for Americans working in those countries.
The shortsightedness, if not the ineptitude of those policies should by now be clear to those banks, as they cannot escape FATCA. As for instance the threat of paying a 30% withholding tax on transactions with non-participating FFIs.
It is also bad business: any high net worth individual in any country, and in the US in particular, needs to consider as a diversification strategy to hold assets in another jurisdiction in all transparency as a protection from lawsuits, if not from aggressive law enforcement agencies or just simply natural disaster. How on earth would a bank in Luxembourg give up on that large market, as the post-tax-evasion financial center needs to focus on larger private banking accounts?