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EC says cooperation on FATCA advances promotion of automatic information exchange

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Efforts to promote ‘global application’ of automatic exchange of information have been advanced by cooperation between governments on a new anti-tax evasion law being introduced in the United States, according to the European Commission. But KPMG has claimed that implementation will cost the financial services industry ‘much more than it is likely to raise for the IRS’.

As the Internal Revenue Service published proposed regulations last week the governments of the UK, France, Germany, Italy and Spain (‘the FATCA partners’) and the US set out an agreed approach, focusing on the use of existing tax treaties, to the application of the Foreign Account Tax Compliance Act.

The US said it was ‘willing to reciprocate’ in collecting and exchanging, on an automatic basis, information on accounts held in US financial institutions by residents of FATCA partners.

FATCA, enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, targets tax evasion by US residents using foreign accounts.

The proposed FATCA regulations run to 388 pages. IRS Commissioner Doug Shulman they reflected ‘our commitment to take into account the implementation challenges of affected financial institutions while allowing for a smooth and timely roll-out of the law’.

HM Treasury said the focus would be on ‘an intergovernmental approach to information exchange, which addresses certain legal difficulties and compliance burdens that would otherwise arise for financial institutions affected by FATCA’.

In the joint statement, available on the Treasury website, the FATCA partners said they were ‘supportive of the underlying goals’. But there was a concern that financial institutions ‘may not be able to comply with the reporting, withholding and account closure requirements because of legal restrictions’.

The agreed approach ‘focuses on the use of existing tax treaties for information exchange between tax authorities, rather than direct reporting by financial institutions to the US Internal Revenue Service’, the Treasury said.

‘More business-friendly’

The European Commission welcomed ‘the USA's acceptance of a government-to-government approach’.

‘This more business-friendly arrangement for EU financial institutions is the result of intense discussions with the USA, following a letter sent by the Commission and EU Presidency to the US tax authorities in April 2011,’ it said.

The administrative burden, compliance costs and legal difficulties which EU financial institutions would otherwise face in applying FATCA should be greatly reduced, it added. ‘The financial industry estimates that the costs of ensuring compliance with FATCA as initially designed would have been significant, with some sources estimating the cost of the required adaptation as $100m for each multinational bank.’

The cooperation with the US regarding FATCA ‘should help greatly in advancing the EU's efforts to promote the global application of automatic exchange of information for tax purposes’.

‘A major challenge’

Adrian Harkin, Global FATCA Leader at KPMG, said: ‘On the one hand, the IRS has done a good job in listening to the financial services industry and has tightened the scope of FATCA, making the proposals more proportionate.  We estimate that these measures could reduce the implementation cost of FATCA by more than $10bn.

‘On the other hand, FATCA will still cost the industry much more than it is likely to raise for the IRS. Plus, the introduction of bilateral FATCA agreements between countries will add more complexity into the mix for the biggest global financial institutions. The bottom line is FATCA continues to present a major challenge to the industry at a difficult time and any efforts to further reduce its impact would be welcome.’

‘Tricky issues’

Philip Harle, a Partner at Hogan Lovells, said FATCA had been widely criticised. Writing in this week’s Tax Journal, he said compliance with IRS agreements could breach local data protection and privacy laws and agreements with customers. Identifying US account holders would impose a costly burden on financial institutions, he said, and the requirement for them to withhold tax on so-called ‘passthru payments’ introduced ‘cost, complexity and commercial issues’.

But the proposed regulations, together with the joint statement, took ‘welcome steps towards mitigating each of these issues’. The joint approach would provide ‘a framework for solving tricky legal issues’. 


A common approach

The joint statement sets out a possible framework for the intergovernmental approach and says:

‘Because the policy objective of FATCA is to achieve reporting, not to collect withholding tax, the United States is open to adopting an intergovernmental approach to implement FATCA and improve international tax compliance.

‘In this regard the United States is willing to reciprocate in collecting and exchanging on an automatic basis information on accounts held in US financial institutions by residents of France, Germany, Italy, Spain and the United Kingdom. The approach under discussion, therefore, would enhance compliance and facilitate enforcement to the benefit of all parties.

‘The United States, France, Germany, Italy, Spain and the United Kingdom are cognizant of the need to keep compliance costs as low as possible for financial institutions and other stakeholders and are committed to  working together over the longer term towards  achieving common reporting and due diligence standards.

‘In light of these considerations, the United States, France, Germany, Italy, Spain and the United Kingdom have agreed to explore a common approach to FATCA implementation through domestic reporting and reciprocal automatic exchange and based on  existing bilateral tax treaties.’