October 3, 2012
Kaye Presents Innovations in the War on Tax Evasion at Boston College
Tax evasion is a global problem. It requires a global solution. Nevertheless, the United States chose a unilateral response to the offshore tax evasion problem that could no longer be ignored after the UBS scandal. The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act and essentially enlists foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. Failure to do so will result in withholding on a wide range of payments from the United States to these nonparticipating financial institutions.
This garnered worldwide attention! A letter from the European Union to the IRS and U.S. Treasury expressed concerns about the compliance burden on the EU financial industry and the potential conflict with the various EU Member States’ laws on privacy and data protection. The European Union Savings Directive took effect in the Member States in 2005 and inter alia enables Member States’ tax administrations to automatically exchange information on individual’s interest income. Given the European Unions’ initiatives in information exchange, the European Commission had hopes of negotiating an EU-wide accommodation.
However, on February 8, 2012, the Treasury Department issued a joint statement announcing that it was negotiating agreements with the UK, France, Germany, Italy and Spain that would allow their financial institutions to provide the required U.S. accountholder information to their own governments with reciprocal automatic information exchange between governments. Despite the movement toward “transnational tax information exchange networks,” the U.S. has chosen to resolve any issues that arise in the implementation of FATCA through bilateral agreements. This unfortunately continues the ad hoc approach, “reciprocal bargaining in the national interest” that characterizes international tax regulation. However, as evidenced by the OECD and EU reactions, the unilateral action of the United States may in fact lead countries and international organizations to deal more expeditiously with the tax evasion problem than otherwise would have occurred. This article explores the ramifications of FATCA and the international response to its requirements.
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