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Is FATCA the new „Pax Americana”?

On 1st of January 2013, the American FATCA tax law (Foreign Account Tax Compliance Act) adopted in 2010 comes into force which leads to – putting it simply – the disclosure, for tax purposes, of American assets hidden abroad and details of the assets' owners. What is peculiar about the Polish comments on the new American regulations is that they raise the issues of technical, financial and time difficulties in adjusting the new law within the legal frameworks of other states, including Poland rather than the essence of the document - namely, that it constitutes a distinct tax „Pax Americana”.


Much more critical to the tax expansion of the American government abroad are, not surprisingly actually, the Americans themselves. Professor Beckett G. Cantley directly states that the USA continue to interpret their national interests in terms of projection of power outside the US borders, except that their military power transforms into a tax power. If the USA introduce in their domestic laws changes which affect the sovereignty of the internal law of another state, there is no reason – in the opinion of professor Cantley – why other states shall not act in the same way as the US.

This may result in a situation where the new American law grounded in the noble aim to investigate dishonest taxpayers and unethical financial institutions in tax havens turns out to be the idiomatic 'shot in the foot' in relation to the American economy'.

What is FATCA all about?

The provisions of FATCA oblige any banks and foreign financial institutions (brokerage houses, insurance funds, pension funds, insurance companies, trust funds) to disclose to the American IRS (Internal Revenue Service) accounts held by American citizens as well as business entities with large shares owned by US taxpayers. Otherwise they would face the risk of a 30% tax sanction on any transfers from the USA being imposed on them. Moreover, any foreign company which is not listed on a stock exchange or any foreign partnership with 10% American ownership are obliged to provide the IRS with names and tax identification numbers of every single American shareholder.

Primarily it was planned that foreign financial institutions would have to conclude a special agreement with the IRS by 30th of June 2013, which would cover the above mentioned matters. Currently it is already known that the European Commission works to adopt a common position which would concern a common method of implementation of FATCA in EU Member States; and in February 2012 the US concluded agreements with the United Kingdom, France, Germany, Italy and Spain, which provides that any interested countries shall adopt internal regulations concerning the collection, processing and transfer of information required under FATCA.

American owners of foreign assets and Green Cards holders will have to report such assets through a special form if these amount to more than USD 50,000. If they do not fulfill this requirement, a penalty of USD 10,000 will be imposed on them (or a penalty up to USD 50,000 if the IRS notices and declares that they fail to report them on a regular basis). FATCA eliminates tax loopholes, which have until now been used by some investors to avoid paying tax on dividend, transforming it into dividend equivalent.

FATCA creates serious – and according to ACA (American Citizens Abroad) – negative consequences for whole American economy and especially for American markets and financial institutions, American business activities on global markets and will affect American citizens residing abroad.

Let us add that FATCA may have a negative influence on the global banking system, by infringing upon the foundation of this system – namely the bank secrecy. Planned to clamp down on its citizens 'fleeing' to tax havens, it blindly bears upon individuals who are outside the scope of the planned regulations and its results may be contrary to what was envisaged.

Correct diagnosis, wrong cure

Diagnosis was first made by the PSI (Permanent Subcommittee on Investigation), which is part of the U.S. Senate Committee on Homeland Security and Governmental Affairs and which on the 1st of August 2006 published its report concerning assets of American citizens held abroad, especially in tax havens. The report concluded that an alarmingly large number of rich Americans uses offshore bank accounts to evade taxes and the current law is not capable of controlling this procedure. The Chairman, Carl Levin, observed that the world of tax fraud grew so large that even the US government is not able to keep up. The investigation constituted the first serious attack on tax havens by the federal government, although the US declared that it targeted the undisclosed foreign accounts. The assault – sticking to the military vocabulary – was largely aimed at Switzerland as the historical and, it would seem, a steady bastion of bank secrecy, in which the American citizens were most willing to open their foreign accounts.

Two years later, on the 17th of July 2008, the PSI published a report entitled 'Tax havens banks and U.S. tax compliance', exposing the tax evasion activities. The report revealed that the USA lose around USD 100 billions per annum as a result of their citizens holding offshore bank accounts and evading taxes. According to the US Department of Justice, American customers held 19 thousands accounts in the Swiss UBS bank for the overall amount of around USD 18-20 billions, and many of them did not want to disclose their identity and refused to pay taxes. Moreover, UBS employees helped US taxpayers conceal their identities by creating factitious nominee entities in places which are too remote to be influenced by the American jurisdiction. The report maintained that the UBS not only helped evade taxes, but also shaped such strategy against tax authorities of the USA and other states.

In May 2008 in the USA a private bank officer formally employed by the UBS AG in Switzerland was arrested on suspicion of conspiracy with American citizens. The conspiracy aimed at defrauding the taxes in the amount of USD 7,2 million owed to the IRS in respect of assets in the amount of USD 200 million concealed on the accounts held in Switzerland and Liechtenstein. The former UBS bank officer Bradley Birkenfeld, an American citizen pleaded guilty and his testimony enhanced the knowledge of UBS dubious activities.

It turned out that UBS employees applied various maneuvers and gave such hints to the bank's American customers. They advised their workers traveling to the USA to provide customer service to falsely declare at Customs that they travel as tourists rather than for business purposes; they encouraged their clients to destroy bank documents and keep their accounts secret. Some clients were instructed how to hide their watches, jewelery and pieces of art purchased for funds deposited in tax havens. The clients were even urged to use Swiss credit cards, so that the IRS would not be able to track their purchases. Birkenfeld's testimony was key to further federal investigation.

For the first time in history, the USA accused a Swiss bank officer of helping US citizens with tax evasion. On 30th of June 2008, the USA took the next step. They requested the district court of the Southern District of Florida to issue an authorization for the IRS to demand from the UBS the disclosure of names of all US citizens holding accounts with the bank and against whom there is a suspicion of tax evasion. The court accepted the request – this was the so-called John Doe summons, the first attempt to gain an insight into Switzerland's bank secrecy, demanding a Swiss bank to disclose its clients' details.

From that moment, Switzerland and a few other states – tax havens have been subject to an immense pressure from the USA, Germany, France and United Kingdom. In August 2009, UBS transferred to the US authorities data of around 250 clients and announced that it would transfer information on further 4450 individuals. In response to this, the IRS canceled the so-called John Doe summons imposed on UBS. In March 2012, the Swiss parliament ratified a double taxation agreement from September 2009 signed by both countries and in June Switzerland joined the countries which had accepted the implementation of FATCA regulations.

UBS bank was therefore supposed to serve as a threatening example. Successfully dealing with the bank created the basis for FATCA implementation. The effects are already visible, even before the law has entered into force. In the face of prospective problems many banks, based mostly but not only in offshore jurisdictions, do not accept American citizens as their customers. As a result Deutsche Bank, Commerzbank, HSBC, ING Group and Credit Suisse close the brokerage accounts of US citizens due to 'oppressiveness' of American laws, which will enter into force at the beginning of next year.

It is obvious that the bigger the pressure of the USA against offshore account holders and financial institutions, the stronger the effect of threatening the citizens who still have doubts with regard to exposing themselves to the IRS. The fact that the IRS and the US government were capable of gaining the details of UBS American customers sends a message to any other persons and bodies what a powerful weapon the USA has in its armory.

To conclude, the aim of exposing the irregularities in the UBS and disgracing the bank was to intimidate American taxpayers and their advisors in tax havens. It was to demonstrate that the existing traditional legal system is not able to control the persons evading taxes.

In this respect, choosing Switzerland – the biggest tax haven – as subject of the first attack was well measured and deliberate. Undoubtedly, behind the accusations against the UBS, in many ways justified, there was the intention of the USA to renegotiate a more beneficial tax information exchange agreement (TIEA) with Switzerland.

Controversies around FATCA

FATCA provokes common concerns and even fear of an imposed control of capital, prospective investigations, infringement of privacy of dual citizens. Many express doubts with regard to the reality and legitimacy of implementation of its provisions.

The concerns and criticism of the new tax law was most strongly articulated by the ACA association, representing 6 millions of Americans living abroad. The conclusion of its substantial standpoint („Why FATCA is Bad for America and Why it Should be Repealed") is the following: FATCA is based on a wrong assumption that foreign financial institutions, which did not tend to favour the USA, will overnight become voluntary and selfless agents of the IRS. Implementation of the new law will result in a serious chaos in the functioning of the global finances, and reasonable people and entities will apply a number of contractions which, due to their amount and variety are hard to predict. One may already today assume that the aggravated effect of the implementation of this law will constitute a significant hit in the economic interests and prestige of the United States and a prospective loss in investments amounting to billions of US dollars.

In its detailed analysis, apart from discussing the costs of the operation itself and the time and bureaucratic barriers, ACA indicated a number of negative consequences, mostly economic, namely:

  • Many financial institutions will not establish cooperation with the IRS at all, even if it would mean breaking relations with the USA in terms of banking,
  • A large number of banks and institutions will cease to provide services to American clients – the process has already commenced in practice. The Japanese Banking Association declared that implementation of FATCA is practically unfeasible for Japanese financial institutions and will result in them backing out of any undertakings with an American element. A similar approach was expressed by Euro Banking Association stressing that small financial institutions with limited American investments would rather get rid of these shares than make a deal with a foreign tax authority – a deal which brings about new obligations and is linked to image as well as financial risks.
  • A potential loss of a part of direct foreign investment in the USA, currently amounting to USD 2.7 billions, should be taken into account. The losses may be higher than profits gained due to FATCA's implementation.
  • There is a risk of foreigners withdrawing their deposits from American banks. Foreign owners hold more than USD 1 billion on bank deposits in the USA, because these funds are not subject to taxes and the USA constitute a kind of tax haven for foreigners residing outside of the USA. However, in the face of a 30% tax which may be imposed on transfers from such deposits into foreign accounts, the attractiveness of American bank services will end.
  • FATCA will create a dual international banking system, with the USA as the loser, and China as the inevitable winner-country, where any international transfers are conducted through state owned banks which are not covered by FATCA regulations.
  • FATCA requires that the national identity of clients be identified, whereas many banks do not ask about it. For instance Canada would have to amend its regulations concerning privacy and personal data protection. Many states would find themselves in a similar position.
  • The new law discriminates against American citizens living abroad, it ruins them and it ruins the American foreign investments.
  • The American IRS has enough means at its disposal to go after tax evasion cases (which it clearly proved in case of the UBS), therefore the new law is futile.

The time for sad conclusions

FATCA certainly constitutes a manifestation of interference of American law into the domestic laws of sovereign states and a bad faith, if not of the USA as a state, then at least of its tax authorities. The problem with this attack is not its reason, in many ways understandable, but its means. The Unites States are traditionally indomitable when it comes to the protection of their citizens and institutions against interference of other states' laws not compatible with their regulations. There is no doubt that double standards are used by the US with respect to the rest of the world – other countries shall obey by the US laws, but must not impose anything on the free and proud American people.

One may argue that whether or not and regardless of the form the FATCA agreement, still debated, comes into force; the US have already been successful. We do not even have to mention the number of the accounts disclosed so far and the American taxpayers 'put in their places'; it is about the precedent. The UBS case served the USA not only to identify their citizens holding undisclosed accounts with the bank, but most importantly it served for the performance of a wider goal, namely to induce the effect of threat against foreign banks and advisors that assisted in the creation or openings of bank accounts in tax havens.

FATCA authors must have been and certainly are aware of the fact that implementation of FATCA in its initial form of 2010 is impossible. A number of amendments and modifications has already been made. Further changes are being discussed. A network of banks, financial institutions, advisors etc. addressed by this law is so enormous, that there are no means for taking effective legal actions enforcing the desired conduct from all these institutions. But maybe this was not the goal. However risky our last thesis may sound, it is worth articulating it: the announcement of introduction of FATCA may turn out to be more dangerous than the implementation itself. ACA's opinion may prove predictive – that this law, against its authors' intentions, will create more problems than benefits to the American economy.

Authors: Robert Nogacki, attorney at law, Marek Ciecierski Ph.D

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