The Foreign Account Tax Compliance

Act (FATCA)

MAS 6309

Siddharth Aggarwal

December 10, 2014

The University of Texas at Dallas

For: Professor Steven Solcher

Naveen Jindal School of Management

JSOM 4.425

Table of Contents

1. FATCA Executive summary

2. FATCA-A brief overview

3. FATCA-Implementation Timeline considerations

4. FATCA-Compliance efforts

5. FATCA-Individual Impact

6. FATCA’ future global cousins

7. FATCA’s opponents and their reasoning

8. International examples of benign negligence

9. Impact to FFIs & Companies

10. FATCA’s efforts to establish global trust with the IGAs

11. GATCA & Rubik: FATCA cousins making an international mess

12. Local impact of FATCA

13. Asian preference for FATCA

14. Green Card holders and Lawful permanent residents abroad

15. FATCA White Papers

16. Technological implementation Categories

17. Successful FATCA implementation scenarios

18. FATCA-Proposed Solutions

19. Conclusion

20. Works Cited/Bibliography

21. Appendix

FATCA Executive Summary

The Foreign Account Tax Compliance Act is a measured response by the United

States government, signed in 2010 and implemented in 2014 after a litany of

modifications along the way. It is one of many federal government efforts to generate

greatly needed lost tax revenues from US-related persons’ accounts overseas.

Whereas it doesn’t ensure that the vast majority of lost tax revenues will be collected, it

does guarantee hundreds of millions of dollars of new revenues to the IRS and Treasury

department. It does this while also creating a global policing standard to ensure future

dodgers think twice before hiding monies overseas. Some important ramifications of

FATCA domestically and internationally are yet pending. A new generation of “FATCA”-

inspired models developed by European nations and other parts of the world are now

looking to the United States for guidance on how to recoup tax revenue losses. The

impact to US related persons is staggering on several levels (individually, holistically).

As of 2013, FATCA has been increasingly mentioned in leading financial and daily

newspapers like USA Today and the Wall Street Journal. Any FATCA news commonly

produces negative headlines like “Americans abroad find citizenship too taxing to

complete” and “American Expats’ Tax Nightmare”.127 These headlines certainly do not

help the US government with its goals for FATCA. FATCA written in 2010 as an

addendum to a “jobs bill” and lacked functional depth. Although the United States

Department of the Treasury jointly with the IRS has had the crucial undertaking to fill out

the details of FATCA; recently some important details and questions for all parties

involved have arisen over the past four years. A nonresident US Citizen must consider

FATCA’s important ramifications such as its current global impact, its individual impact,

and its impact on commercial dealings between taxpayers and FFIs or employers

abroad.

An important purpose of this paper will be to look at what the federal

government’s own auditing agency, the Government Accountability Office (GAO), has

found regarding the assumably billions of dollars of missing revenues to the IRS that

required from US persons overseas. The GAO has indicated that the complexity of pre-

FATCA efforts to collect financial information, called the FBAR recommendations, is

duplicative with current FATCA regulations. The GAO is tasked to ascertain how much

of this duplication contributes to excess costs for US taxing authorities, foreign taxing

agencies, overseas United States Persons filing their taxes, companies with US Citizen

employees, and foreign financial firms with American business dealings that must

comply with FATCA under strict and imminent timelines.

An important position and objective of this paper will be examining how the

Government Accountability Office has found gaps in IRS revenues gathering from

overseas US citizens. The gaps are compounded by the complexity of duplicative pre-

FATCA recommendations (FBARs) with newly added FATCA recommendations and

how much of the duplication contributes to excess costs for the US taxing authorities,

foreign taxing agencies, and overwhelmed non-resident US-related taxpayers overseas

who must comply with FATCA under strict and imminent timelines.

FATCA- A brief overview

The United States annually loses billions or even trillions of dollars as a result of

lost tax revenues from those US Citizens abroad who do not report authentic tax liability

information to the IRS. Under FATCA, foreign banks are required to report account

information owned by U.S. citizens to the IRS. The global recession which ended in

2009, is still being felt a half decade later despite an economy recovery. A recently

elected and popularity-starved 111th Congress tacked on the FATCA law as addenda to

the major Obama-led legislation colloquially known as the “jobs bill”. This bill is known

as the Hiring Incentives to Restore Employment Act. Because of the additional billions

of lost IRS tax revenues from overseas that FATCA could bring with it, politically FATCA

encountered no opposition. Almost 80,000 financial institutions and over 80 countries

and counting have said they will follow FATCA rather than face penalties.1 According to

Richard Harvey, a distinguished Villanova University tax law professor and one of the

original writers of FATCA, the law could actually rake in “$20 to $30 billion” in lost tax

revenues for the Treasury and IRS. 81

FATCA- Implementation Timeline Considerations

America is ubiquitously considered the only industrialized and developed nation

on earth that taxes its citizens everywhere on any earnings. FATCA in theory ensures

that not a single cent is missed without an IRS audit of that individuals’ earnings related

tax information. The original FATCA mandate was scheduled to be implemented on

January 1, 2013 but was delayed in six month intervals eventually to July 1, 2014.

FATCA is legally stated as “Except as otherwise provided in this subsection, the

amendments made by this section shall apply to payments made after December 31,

2012.” But in July 2013, the United States Treasury and the IRS jointly released Notice

2013-43 that delayed FATCA withholding liability to July 1, 2014 from January 1.

FATCA was delayed to give IRS officials, lawmakers, attorneys, accountants, and

taxpayers more time and because many underdeveloped, emerging, and newly

industrialized nations need more guidance and supervision on signed agreements and

intergovernmental agreements (IGAs); necessitated over the past four years. The delay

was imperative but still not enough time grated to most people affected by FATCA. The

extra time added owes a lot to the ambiguity and uncertainty in FATCA guidance. IRS

Notice 2013-43 says that withholding on withholdable payments is not required until July

1, 2014 but withholding is exempt if documentation can reliably prove a withholding

agent can reliably prove exemption status.

Even the Treasury Departments tax policy experts are saying that despite

FATCA’s intent to make sure all taxpayers are paying their dues “regardless of where

they live”, the Treasury Department needs to “maintain a balance between enforcement

efforts and equity, including the burdens that may be placed on taxpayers”. 46

The developed timeline for implementing FATCA presents complexities for American

taxpayers and FFIs. While FFIs support IGAs as a friendly resolution to conflicts in

complying with FATCA, there is continued ambiguity about whether IGAs in various

legal dominions will be impeding FFIs and withholding agents to complete their own tax

audits for due diligence and implementation. Jointly, the Treasury and the IRS have

been ergo extending the timelines for FATCA withholding since 2013 each time at 6

month intervals to allow modifications to be made.

FATCA-Compliance Efforts

In the face of FATCA appended to the Internal Revenue Code in 2010, financial firms

and other withholding agents have been busy the past few years making sure FATCA

upholds and maintains standards with regards to payments. Pre-FATCA rules and grandfather

clauses dating to prior to December 31, 2012 are important in terms of integration to current

FATCA adherence. They must adhere to the post-grandfathered 2012 requirements which

were finalized by January 2013. 5 These obligations include debt instruments before

12/31/12 that are not subject to FATCA withholding. Reissued debt and equities (for

income tax purposes) after 12/31/12 will not be grandfathered, and all future transactions

of liquid assets will be subject to FATCA rules. 6 The government has given this extra time

for financial firms to register on an IRS portal to become familiar with the FATCA process

and edit and assess its current information prior to 2014.

FATCA- Individual Impact

Having been passed in 2010, the Foreign Account Tax Compliance Act orders

Americans in foreign countries and their financial firms to report all US clients’ accounts

to the IRS and those entities who fail to do so are subject to 30% withholding tax by the

United States. These laws apply not only to United States citizens but permanent

residents and spouses of citizens and green card holders as well. 10 New immigrants to

the United States are not exempt as well. A “US person” according to the law is anyone

with a meaningful or substantial legal connection to the United States; they are subject

to FATCA, thus ensuring ambiguity in defining what consists of “substantial” and

providing more paid work for tax accountants and tax lawyers. Ambiguity is cleared by a

more specific description for US persons’ for tax purposes would require the person to

be a “specified” US person. FATCA goes beyond persons to entities and says that US

persons’ can also be US branches of foreign corporations that trade stocks, US

incorporated corporations, US tax-exempt organizations, US agencies abroad, any US

possession, banks, real estate investment trusts, regulated investment firms, common

trust funds, charitable trusts, dealers (securities, derivatives, commodities) and

brokers.104 Some US persons may perhaps been born to Canadian parents in American

hospitals or were children of American-born parents but themselves have never been to

the US (let alone lived), are considered US-persons by proxy at the very least.40 42

Even more specifically, a U.S. Account that is Reportable is an account “owned

by a U.S. individual (person), U.S. entity, or a non-U.S. entity that has U.S. owners --

regardless of the currency of the account itself. FATCA applies to all types of financial

accounts, including insurance, investments and business accounts.”14 Incidentally,

FATCA’s individual impact to account holders is being misrepresented on many

occasions by the media and critics since it requires US persons with over $50,000 in

total accounts and assets to report rather than the previous FBAR $10,000 requirement.

This change in reporting sum should significantly alleviate concerns for unemployed

citizens abroad and middle class earners abroad. 82

Yet, the broad and reaching definition of “American” clients is so large now that

many foreign firms think Americans are simply too much of an inconvenience and time

consuming. Even Canadian visitors to the United States, known as “snowbirds” who

choose to stay in America only a few months a year have to make sure they only stay

less than 180 days or so otherwise they face full US tax classification liabilities under

FATCA11. Other requirements include filing if income requirements are met such as

$10,000 for singles and $20,000 for couples in addition to other forms. 10

The issue has grown to such a dilemma that 2013 was the year of the most

American citizenship renunciations in the history of the United States. One dire concern

is taxes are higher in many countries where these Americans are moving to so US tax

liabilities are removed for the most part since the taxes in other places like Canada or

an EU nation are higher. The income tax paid in one of those nations can be used to

balance out any US tax liabilities. Despite these realities, FATCA requires reporting and

past non-reporting by nonresidents over the span of a few decades can and will cost

dearly. The non-reporting for the estimated almost 8 million non-military US Citizens

overseas has cost the government potentially trillions over the past decades but many

of these Americans have been living in ignorance mainly. Of the 8 million US citizens

overseas it has been polled that almost 75% of them are considering giving up their US

passports. 36 Remarkably, the State Department feebly insists that a fee hike starting

September 2014 raising the renunciation fee by over 400% from $450 to $2350 is only

due to increasing demand, increasing turnaround times and labor administrative loads.

53 Because of America’s unique tax laws, US citizens may not owe any taxes however

they face large fees and potential civil and criminal negligence penalties for not filing

forms such as the FBAR (Report of Foreign Bank and Financial Accounts).

Today, an unbiased observer can safely speculate that FATCA is a modern-day

“witch-hunt” for American’s overseas and each of those citizens has a “scarlet letter” or

“yellow star” due to FATCA. Complications have arisen from FATCA such as

American’s now having more difficulty in securing: capital, investment accounts,

insurance, mortgages, opening new bank accounts, job promotions, and even

permanent personal relationships (marriages). Skilled laborers abroad are simply not

being hired because FATCA is costly and time-consuming. FATCA’s double impact on

their compensate packages as expatriates makes them more burdensome for foreign

employers. 82

One significant example of FATCA that bears witness to its potentially

disproportionate and exacerbating reach is the clients of one New York attorney,

“I know of one client whose parents live outside the US," he said. “They are in

their 90s, and have a bank account in their home country. They added their son as a

signatory because if they become incapacitated, they want him to have access to

money to pay their bills. But their account has now been frozen because he's American.

The bank wants the son to provide the last five years of his tax returns before it will

unfreeze the account. He has had to hire a lawyer to sue the bank to let his parents’

access their own money." Americans’ accounts overseas are being frozen and many

times without their own knowledge or unfairly against them. 82

Apparently, non-Americans who do not have the tax reporting requirements

burdens are easier to hire and less expensive. Countless commercial transactions are

at risk because European governments and local agencies do not want the IRS to have

unrestricted access to their finances and even dual EU/US citizens cannot get

savings/checking accounts because of the complications. Another example is of

Americans’ living overseas who are dependent on their EU/non-US spouses. These

Americans are limited in their options because they cannot fill out the necessary

paperwork. Moving to individual bank accounts for these Americans is risky because

they may not have income and under EU laws may not have rights to access their

spouse’s accounts. 3

For married couples, an easy fix would be to remove the American from their

signature right but to be practical and fair, is that really something that non-resident

Americans should be forced to do on their own families’ accounts including personal

and commercial transactions? 83

For the entire furor over FATCA, the issue of privacy seems to be confined to a

double standard. While the IRS will have foreign banks following US protocol of auditing

the financials without America having to take into account that nations’ domestic privacy

laws, the US will have more information on their citizens’ international holdings than

their citizens’ private domestic assets and equities. In other word’s FATCA will allow the

IRS to basically have free financial crimes information gathering services rendered by

foreign banks and foreign agencies as essentially subservient US tax law enforcers

abroad.

FATCA’s future global cousins

America as a superpower has the seeming duplicity of setting these FATCA rules

while its government will be refraining from duplicating the remitting of similar data to

the world’s own FATCA-type settings. The world has modelled a new bilateral tax treaty

backed by dozens of nations to help create truly multinational tax information exchange

(known as GATCA) where gathering is shared. 7 GATCA (Global Account Tax

Compliance Act) is a theoretically more stringent version of FATCA and will be

implemented by leading member nations of the Organisation of for Economic Co-

operation and Development (OECD) including France, Germany, the United Kingdom

and others. 7

According to OECD leaders, FATCA has precipitated the new “GATCA”

reciprocating movement around the world precluding tax dodgers of all nationalities into

an extremely limited range of options to hide assets in the near future. The OECD is

leading the efforts to have an automatic exchange of financial account information that

is draws on the FATCA model, yet goes in differing information gathering route based

on taxpayers’ residence rather than citizenship or residency status as FATCA does.

The potential onslaught of diverging GATCA obligations (also known as AEOI)

could either sync with FATCA or create further discord and disarray. As a prominent

Hong Kong law firm partner said “If GATCA is not harmonised with FATCA and the

various regional information sharing Initiatives, GATCA will add more patches to the

already patchwork quilt of global taxation”.7 According to KPMG, one of the “Big 4”

global audit firms, “Governance requirements for AEOI processes could be significantly

greater than under FATCA, and need to be designed accordingly.” 23

It is not certain whether the United States will the US will accept GATCA in the

near future by 2017 since over 70 nations have in 2014 signed up for GATCA and over

half are committed to starting early by even 2016.8 America would be hypocritical to not

agree to GATCA since laws and regulations are needed to change for the US to permit

sharing information of foreigner’s bank accounts in the US to their home nations’ taxing

agencies. Legally, GATCA is possible but the US Congress may block GATCA’s

implementation in the United States. 7

Almost shockingly, there are even some rumors and anxieties that the US may

not even acknowledge, let alone consider GATCA because the Automatic Exchange of

Information (AEOI) in FATCA may already cover some of GATCA’s requirements,

however, unlike FATCA, GATCA does not apply withholding tax penalty. Secondly as

mentioned earlier, FATCA addresses taxes not only on residency but on citizenship,

(the US is the only country asides from North Korea with citizenship-based taxing)

whereas GATCA focuses on the AEOI (Automatic Exchange of Information) of an

account holder’s tax residence. The US bylaws maybe arrogantly consider AEOI

inadequate from a US tax legal scope.7

FATCA’s opponents and their reasoning

Congress’s decision to tack on FATCA to the Hiring Incentives to Restore

Employment Act (“jobs bill”) early in Obama’s presidency was surprisingly without any

congressional debates and committee hearings as opponents like to point out. 45 The

black and white lettering of the law while intended to be simple ended up complicating

the decision for many taxpayers in whether to report or rescind US passports or to

plainly evade taxes even more. Many congressional members were even aware of the

law’s implications in depth beyond the surface level, hence the recent political jockeying

of both parties on their stance and FATCA’s recent publicity in major American

publications such as Businessweek, Forbes, and the Wall Street Journal. 45

America’s potential relationships with many member OECD nations and GATCA

members will come into light in how America responds to sharing its own financial data

of those aforementioned account holders.2 Public advocacy think tanks like the Cato

Institute have even likened FATCA to “financial imperialism”. 80

Banking associations supported by vote-seeking senators and other politicians

have fought in federal court against the IRS warning of a massive foreign banking

customers’ held assets loss. The federal courts have sided with the IRS, outlining that

the IRS will send the financial information reciprocating the AEOI directives of

accounting holders to the 70 or more nations who have the GATCA requirements. This

ulterior “promise” addresses the bankers’ and opponents supposed concerns and

requires that the transmitted financial information is done so securely. The information is

promised by the court to be only for foreign governments’ taxing agencies’ eyes only as

a means of allaying wealthy clients and banking firms’ fears.18 19

Still, against data on actual revenues lost by emerging economies from offshore

tax evasion being unreliable, the combined annual global estimate is around $120 billion

per year. These losses from tax evasion cause a severe drain on developing nations’

and emerging nations’ social infrastructures because reduced revenues reduces cash

for those nations’ treasuries. Those nations cannot spend valuable tax revenues on

social welfare programs to help curtail poverty. Implementation of modernized

educational and vocational training that would improve the socioeconomic status of

these nations’ citizens on a global scale is prevented. Class warfare-induced riots are

increasingly becoming an issue in much of the emerging world as well as the developed

world such as the European Union (places like UK, Belgium, Greece) where the wealthy

are being overtaxed or undertaxed at inequitable levels compared to the rest of the

population. Even the United States had the dilemma between the “1%” and the “99%” in

America’s 2011 Occupy Wall Street movement which affected national morale and

further socioeconomic commentary. Tax haven nations such as Switzerland in the

future face the potential burden of having a government that is perceived sterile if its

wealthy foreign expatriates can politick the government and its direct-democracy voting

base into bending towards their interests. 117

Yet curiously despite all the American obstinacy to automatic exchange, foreign

nationals such as those from Latin America continue to hold money offshore in Florida

ironically away from their home countries thus making the United States a tax haven in

the same light that its government portrays so many other nations as. 18 Many banks in

places like Miami or outside the US in Hong Kong19 for example hold hundreds to

thousands of US green card holders and citizens’ money and will have to overturn the

information of the once hidden “dirty money”. The IRS has calculated that 400 billion

dollars or more is held domestically by foreign nationals. 18

Other forms of tax dodging such as “quiet disclosures” are being also highlighted

by FATCA but putting FATCA’s gains and the energy put into FATCA versus the lost

IRS and Treasury revenue by underreporting of revenues and net income by small and

medium sized enterprises (SMEs) across the United States, such is a domestic issue. 2

89 The United States Congressional Joint Committee on Taxation has estimated

(perhaps prematurely) that over the first ten years of FATCA, almost $9 billion will be

generated (about $900 million a year). These numbers give fuel to those who oppose

FATCA and undermine the estimates by tax professionals such as Richard Harvey in

the aforementioned estimates of $20 to $30 billion. Yet the critics have pointed that the

costs of FATCA will surely be much higher than $9 billion to implement. 35 The US

federal deficit sat at almost $700 billion in 2013 and around $500 billion in 2014. FATCA

ultimately can be considered an immaterial amount on the grand scale that critics have

legitimate claims in their questions regarding FATCA’s implementation costs.

International examples of benign negligence

There are individual cases of non-reporting in the pre-FATCA era and FATCA

era that have led to the widespread disapproval and fear-mongering of FATCA. An

incident where a schoolteacher overseas voluntarily disclosed her financial information

through the OVDI/OVDP program had her subjected to time-consuming court taxpayer

services, legal fees, and accounting fees of over $50,000 of her own personal wealth. In

fact she was told by the US Embassy that the OVDI/OVDP program was for “criminals,

not schoolteachers”. 84

After much effort, she got the Taxpayer Advocate Service (TAS), an independent

investigative wing of the IRS to work on behalf of her rights pro bono mapping through

the IRS’s complexities. Her experience with the TAS was beneficial and the TAS helped

her file the FBARs and fight her case. She was glad of the TAS’s help and was “happy

to know they were there” during the “confused process” of the OVDP. Her main

takeaway from the experience was that the IRS does not recognize that the “one size

does not fit all” regarding liabilities, tax brackets, and financial reporting requirements. 84

One woman living overseas proceeded to complete her FBAR’s after she heard

about the OVDP but the entire process took about two years the IRS and her

exchanged hundreds of pages of bank records, legal documents, and tax forms in order

for her tax returns to yield the answer of her owing no taxes. She called an American

number but the IRS agent couldn’t call her back directly since she was an international

number. This experience led her to permanently settle abroad stating “it seemed as if

Congress and the IRS were unconcerned about the needs of Americans living abroad” if

they cannot even exchange phone calls overseas.

It doesn’t seem to help that the IRS has given contradictory instructions in the

informal IRS “FAQs” and due to the ever changing terms of the OVDP and the

guidelines of the IRS’s official source of instructions, the IRM (Internal Revenue

Manual). Taxpayers get inconsistent tax advice from their accountants who may also be

struggling to understand the ever-changing bylaws. 84

Another taxpayer was even recommended by a congressional lawmaker to

potentially renounce US citizenship regarding the taxpayer’s situation. The taxpayer

mentioned that some his acquaintances who hold green cards in the US but live in the

taxpayer’s home country are scared to declare earnings because they were benignly

negligent regarding FBARs and that is now ending up them costing them draconian-

level avoidance fines.

One taxpayer making a miniscule amount of rental income on his overseas home

was required by IRS agents to include the value of the home in the calculation of tax

liability, but since the regulation was so “black-and-white” it seemed to the taxpayer that

this requirement was discretionary and disproportionate to the taxpayers net assets.

The taxpayer eventually got his fines reduced from $172000 to $25000 through the aide

of the TAS but it took almost 2.5 years “processing” his “benign negligence”. His

recommendation is that the IRM needs to give IRS agents more discretion to

communicate with taxpayers abroad such as email.84

Impact to FFIs and companies

As mentioned earlier, adherence of FATCA requirements’ may actually cost FFIs,

companies, and individual taxpayers more than the money FATCA collects to give back

to the IRS. A prime example of this is Canada’s second largest bank TD (Toronto

Dominion), who even said it will cost up to 150 million Canadian dollars to change its

systems in accordance to FATCA with regards to overhead and upfront costs such as

employees, training, technology costs, compliance costs and processes. 49

Under FATCA, the definition of an FFI is a “financial institution” outside the US. It

“accepts deposits in the ordinary course of a banking or similar business”; an entity that

“holds financial assets for others as a substantial portion of its business”; an entity

“engaged in reinvesting or trading in securities, partnership interests, commodities,

notional principal contracts, insurance or annuity contracts, or any interest (including

futures, forward contracts or options) in any of these types of assets” (foreign

investment funds, charities, foreign retirement plans); “an insurance company that

issues, or is obligated to make payments to, any cash value insurance contract, annuity

contract or other “financial account” or the holding company of such an insurance

company.” 104 105

A Thomson Reuters Cost of Compliance survey in January 2014 said that only

16% of FFIS and US citizens with foreign accounts felt that FATCA compliance would

cost them anyway from $100000 to $1 million dollars but less than a year later that

number has jumped to 27%. 300 FFIs were polled and over 55% of firms expected to go

over their budgets due to FATCA. The survey was conducted as of October 29, 2014

when over 50 OECD nations signed an agreement to automatically exchanged financial

information (AEOI), also known as the Common Reporting Standards (CRS or GATCA).

The pact is intended to “help to recover the trust the public today has lost” according to

the OECD. 70 Another 34 nations have committed to the pact by 2018. 70

Globally FATCA and its cousins will cause massive budget overruns for FFIs in

addition to requiring time-consuming research to identify the residences of account

holders and determination of the US-related status of the said person. Furthermore,

reporting to the proper tax agencies is necessary as there are many different

bureaucratic agencies amongst many nations. Critics argue that the “scope, depth, and

complexity of reporting” will cause FATCA to become a bigger “problem” than it already

is. Yet supporters like the British Finance Minister Osborne say that the more countries

that sign CRS (AEOI) and the more CRS is refined and retooled, countries’ taxing

agencies will be able to “clamp down on tax evaders”. The German Finance Minister

Wolfgang Schaeuble even said that CRS is necessary because “banking secrecy, it its

old form, is obsolete. 72 74 Most nations seem to agree that the current tax guidelines are

needed for modern global economies. 75

If America does decide to automatically exchange information, the

intergovernmental agreements could do wonders for global diplomacy in other sectors.13

If not, the ramifications are particularly dangerous for the United States. If derivative

securities, bank deposits, debt securities, and equity securities are withdrawn from the

United States by foreigners, foreign direct investment (FDI) will be severely impacted. 12

United States-based FDI is estimated at almost $3 trillion and would affect the future

growth potential of the recovering United States economy which has fully recovered yet

in 2014. Attracting FDI necessitates that foreign companies have eased regulations and

more transparency allowing them to easily divest funds across borders. The free flow of

wealth and capital from those nations to the United States would contribute to already

high underemployment and unemployment. Trade deficits would get worse and FATCA

may be attributed to all this. 12

The aforementioned “patchwork” of agreements could add to further perceived

disarray in compliance processing for multinational banks and portfolio traders. FATCA

even has a nickname now as the Fear and Total Confusion Act. 13 The nickname’s

justification can be added from The Bank Secrecy Act (BSA) by Congress in 1970. The

law is almost a half century old and requires a form to be filled by taxpayers called the

FBAR which requires US-related persons including those with financial interests in the

United States to file paperwork with the US Treasury.55 These FBARs antecede FATCA

by about 40 years but the policing of this law has been lax at best despite the IRS

having implemented many programs. As recently as 2009, the OVDP (OVDI)(Offshore

Voluntary Disclosure Program/Initiative) was a major FBAR restructuring attempt. 51

These programs were in effect to encourage non-resident US citizens to comply with

IRS guidelines and give them enough time to gather their assets for recordkeeping and

reporting.55

Critics of FATCA actually claim that the OVDP is far more successful than the

FATCA will be and OVDP is superior to the ill-fated OVCI (Offshore Voluntary

Compliance Initiative). The OVCI was a 2003 IRS plan to attract offshore Americans

who evade taxes using offshore tax haven-based credit cards only yielded 1,300

evaders. Before 2014, the latest version of the OVDP is the 2012 OVDP. The 2012

version is the third after the 2009 and 2011 OVDP. In fact, the IRS estimates that these

three programs have generated over $6.5 billion in lost tax revenues, interest, and

penalties through voluntarily compliance of 45,000 taxpayers who otherwise would not

have reported to the IRS prior to the program. 87 FATCA has influenced OVDP since the

latest edition of OVDP, 2014, is potentially subject to 50% offshore penalties compared

to 27.5% in 2012, 25% in 2011, and 20% in 2009 97 . Enforcement is done by FinCEN, a

bureau of the US Treasury that fights financial crimes dating to the Bank Secrecy Act’s

FBARs. Due to the enormity of FATCA compared to OVDP, FinCEN now has turned its

attention towards FATCA and away from its past OVDP mandate.

More fear and confusion is added by the fact that those non-abiding US citizens

for all these years are suddenly liable for their past “transgressions” and current non-

reporting. In fact in 2012 only about 825,000 FBARs were filed which indicates only

10% of US citizens abroad (and many more US-related persons) are reporting and most

disturbingly are not reporting. What’s even more alarming is that those who ignored or

misrepresented their FBAR forms, some of them are irate and actually blaming the IRS

for causing them to be “ignorant” of the FBAR rules and paperwork. Despite all of the

government’s efforts to publicize the FBAR and institute questions about foreign bank

accounts on the U.S. Individual Income Tax Return Form 1040, many answered “No”

knowingly. Whether they knew about the rules or not, those who didn’t pay in the past

can complete “quiet disclosures” but that amounts to “admitting by amending” past due

FBARs to the IRS. These taxpayers think that amended tax returns will prevent

penalties but the GAO, which says that the IRS is aware of the multiple violations in the

processing and writing of tax forms with “amended” quiet disclosures. Tens of Billions

of dollars in losses are occurring to the IRS/Treasury Department according to the GAO

due to the fact that only about 40,000 people applied for IRS amnesty but the number of

foreign accounts ranges to almost 520,000. Penalties can be almost ten years in prison

and multiple fines that range from 25% of total assets or $500,000 depending on the

size of the account. 56 57 58 59

Anti-FATCA and anti-automatic exchange proponents say that most

governments around the world especially in emerging economies such as the BRICS

nations (including India, China, Brazil, Russia) already have appropriate systems in

place to collect important financial information about their taxpayers. FATCA supporters

can argue that the biggest benefit of the FATCA-inspired automatic exchange model

may be “that it deters rather than detects” according to one official at the Tax Justice

Network, a tax research and advocacy group. 12

Bankers’ associations and foreign governments have other arguments against

FATCA. They claim that the IRS already has many tools to track tax evaders such as

Tax Information Agreements, international agency conventions, and Legal Assistance

treaties. Despite the media uproar over America’s tax evaders, the IRS has actually

collected over almost $6 billion from recent charges of noncompliant banking firms and

taxpayers prior to FATCA. 12 FATCA is designated as a law to convince foreigners to

favor the US’s strict tax laws and help the US find delinquent US-related persons’

accounts.

One of the major global pitfalls of FATCA is that the law grants exemption from

reporting only if the foreign entity does not have a substantial U.S. ownership holding

defined as under 10%. Basically any person with 10% or more interest in a foreign

corporation, partnership, or trust is liable. This 10% ownership rule applies to millions of

companies around the world who may be non-listed and privately held and have

financial transactions with the United States. This requirement also includes names and

addresses of the foreign partners. The foreign names will appear in tax filings of

American citizens and the IRS consequently would be able to valuate privately held

non-listed companies. This simple act would prevent millions or billions of dollars of FDI

from abroad remitted to the United States while circumventing Americans in foreign

investments overseas. An example of this instance is a joint venture that comprises

foreigners and an American overseas, but because of the IRS reporting requirement the

American would be have to kicked out of the team regardless if the American started

the venture. The logic would is that if an American is part of a group of partners in a joint

venture with signature capability in a commercial bank account; their foreign team

partners may become extremely reluctant to allow the IRS to audit the joint venture for

tax liabilities. There are basically penalties for non-reporting whether income tax is owed

or not, a penalty is appraised for reporting failure.83

For non-US corporations and partnerships that are not FFIs, FATCA enforces a

30% withholding tax on US-source payments to “entities such as corporations,

partnerships or trusts that are not FFIs unless certain requires can be proven. For

NFFEs (Non-Financial Foreign Entity), the compliance regulations are less onerous

than those for FFIs but still 30% withholding penalties can be applied if compliance

efforts are not made. NFFEs typically have to prove their FATCA exemption status with

certifications showing they do not have substantial US owners or provide the names,

addresses, and TIN (Taxpayer Identification Numbers) of each substantial US owner.

NFFEs are typically corporations with traded stock, governments, international

organizations, or any other type of bank or firm that poses lower tax evasion risks

according to the IRS. NFFE’s must be certified as “Passive”, “Active”, or “Excepted” to

avoid withholding penalties. Those entities, who are “Excepted NFFEs”, include several

entities such as exempt entities wholly owned by exempt beneficial owners and Active

NFFEs (if less than 50% of its gross income is passive and less than 50% of its assets

produce passive income). The IRS decides “Excepted NFFE’s” as those who “will not

be vehicles for US persons to hide their assets because of the nature of their activities”.

86 91

Active NFFEs conduct a business activity on an ongoing and income-generating

basis. Passive NFFEs are officially designated as those entities that are not otherwise

“Excepted” or “Active”. They include privately held operating businesses, professional

service firms, and other non-publicly traded foreign entity that is not dealing with

investment-sector and banking.

The 10% US holdings rule is fiscally illogical for American commercial expansion

overseas and the perception of the American economy in the world’s eyes. Foreigners,

companies, and FFIs will increasingly reject any business dealings with Americans if

this law continues. In an ever increasingly global economy, America cannot afford to

risk being difficult to do business especially as BRIC economies seek to increase their

ease of doing business ranking in order to grow their GDP. 12 As a tax partner from

Shearman & Sterling LLP in New York said “The U.S. government no longer has the

ability to dictate tax policy to the rest of the world. People can go to Tokyo, Hong Kong,

and London. They do not have to deal with the headache of doing business in the

U.S."82

Another set of arguments globally against the FATCA-inspired GATCA AEOI

guidelines is also by the Tax Justice Network who says that the OECD is still promoting

corruption and loopholes. “Yet again, the OECD has flunked an opportunity to rid the

world of the curse of tax havenry. Faced with the possibility of creating a multilateral

system for exchanging tax information between all countries, they have come forward

with a set of proposals that offer non-reciprocal processes to tax havens, while requiring

reciprocity from developing countries. This does not reflect well on an organisation

whose membership includes so many of the world-leading tax havens. Much as a

leopard cannot readily change its spots, the OECD also cannot readily drop its pro tax

haven agenda, albeit that its bias lies hidden in the small print.”, in harsh language by

Markus Meinzer, a senior tax analyst at the TJN. According to the TJN, the OECD is yet

sheltering the tax havens. These criticisms include the demands that developing OECD

nations will have to put up the upfront costs (which they won’t be able) to be part of

AOEI but tax havens have to provide financial data but can opt not to receive data

because it believes the developing nation is not providing adequate information, thus

negating reciprocity. 25 The OECD allows tax havens to opt for bilateral agreements,

excluding developing countries from pursuing their tax cheats. Reciprocal exchange of

tax dodger information is only possible through AEOI agreements. A great example of

where a tax havens’ surprising demand for an “exchange model” is preposterously

biased is Nigeria would have to report tax data about wealthy Swiss persons’ accounts

in Nigeria. Conversely, Switzerland would not be legally obliged to give tax information

on Nigerians’ holdings assets in Switzerland since Nigeria would be unable to provide

an equivalent scope of information. Swiss persons’ holdings in Nigeria are not a

significant concern to international tax policymakers because Switzerland is the tax

haven in question, not Nigeria. Nigeria probably does not have the database systems

and trained data-mining experts produced in place to automatically exchange with

Switzerland. 128 Not only does this loophole allow Switzerland to keep Nigerians’ assets

in Switzerland but these gripes potentially ensure Switzerland’s efforts to slow the AEOI

process for as long as possible for the eventual full AEOI implementation while

extremely wealthy tax dodgers can find alternative options.128 The ongoing debate and

developments over the development of AEOI inspired GATCA will potentially affect

further concessions to FATCA by the United States Department of the Treasury, the

IRS, and the United States Congress.

As mentioned earlier, that the United States may not consider the bylaws of what

the AEOI requires. This is contrary to what FATCA had promised. FATCA was written

as a legal assurance that reciprocity would be proactively sought between foreign tax

agencies and the US IRS to facilitate tax evader information gathering. Foreign

governments have undoubtedly hesitated to comply with FATCA without an expectation

that they also may inspect foreign nationals’ securities in American trading markets. The

US is for now singularly acting out on FATCA without reciprocating concessions to

foreign agencies. FATCA’s future remains tenuous for it has many left supporters and

right opponents domestically while also having many opponents overseas, citizens and

foreign national governments alike.45

FATCA’s efforts to establish global trust with the IGAs

FATCA was written in 2010 under a recently elected Democratic majority in both

houses of Congress and a Democratic President. The United States Treasury

Department and the IRS jointly wrote (in July/November 2012 respectively) two models

for Intergovernmental Agreements which makes it easier for nations to address legal

impediments to compliance with FATCA. Multiple criteria for FATCA since 2010 are

mirroring presently held anti-money laundering international sanctions such as KYC and

AML (Know Your Customer & Anti-Money Laundering). FATCA broadens the scope of

breadth of KYC international guidelines by requiring detailed and real-time information

on banking customers of FFIs. FATCA regulations will be more in-depth than the KYC

processes and client background checking before onboarding a new client to the bank’s

various channels legally and in accordance to bank regulations. 62 As mentioned

earlier, FATCA’s main concerns of overseas accounts is the US-related position of the

account rather than the KYC requirements which are parameters more related to credit

risk. FATCA requires that FFIs give the change of the client’s physical addresses or

change in any legal titles which can allow easier gathering of information on the client’s

accounts’ legal US-related status. 61

The IGA’s just like FATCA were written and put into implementation again

without Congressional debate, consultation, nor endorsement. With the IGAs, the US is

promising AEOI in the long-term while extending its own time frame for short term

manipulation of FATCA to best suit its own tax revenue generating needs. Reciprocity is

required by foreign nations to justify America’s apparent “bullying” of FATCA into those

nations’ own tax laws and the IGAs are the solution in the form of appeasement models.

An IGA implementation agreement with a foreign country is Australia. Without the IGAs

Australia cannot legally agree under its laws to comply with FATCA’s obligations. The

IGAs will loosen Australian’s domestic law regulations for FATCA. A senior partner at

EY in Melbourne says that "Clearly, the IGA makes life a lot easier for organisations. It

essentially removes withholding obligations, and it removes a lot of the privacy concerns

that organisations may have about reporting to the IRS.”50 Many countries have yet to

sign IGAs with the US, specifically China, who finally agreed to the IGA accords late

compared to other IGA nations in June 2014. 51

To make amends to opponents of FATCA and ill-prepared nations, banking firms,

and taxing agencies; part of the concessions the IRS and Department of the Treasury

are making for those partners in the implementation of intergovernmental agreements

(IGAs) is that the Treasury department released two models. Either model can be

chosen by various agencies and partners. Model 1 is for bilateral agreements with other

taxing nations that would allow FFIs to fulfill requirements under United States Code

Title 26-IRS Code, Subtitle A-Income Taxes, Chapter 4-Taxes to Enforce Reporting on

Certain Foreign Accounts. Those requirements would include reporting tax information

on US based accounts to foreign tax authorities who would reciprocate tax reporting

information on US-related persons’ accounts in their jurisdiction. Model 1 was unveiled

in July 2012 and Model 2 in November 2012. Model 2 allows FFIs to directly report

specific tax information on accounts with the IRS on a direct basis. The government

AEOI would go into effect on demand subsequently. Several bilateral IGAs have been

formulated due to the two US IGA Models which are regularly given addendums since

their inception. 20 22

GATCA and Rubik: FATCA cousins making an international mess

GATCA, also known as the Common Reporting Standard (CRS) has been

embraced by major global financial wealth holders such as Switzerland. Switzerland

which was one of the main targets of the creators of FATCA, has said it would warmly

welcome FATCA on the expectation that it gets to “cherry pick” what FATCA & GATCA

standards it upholds and rejects which it doesn’t agree with. 21 Switzerland has brazenly

stated that the AEOI parameters will be commenced in detail with “selected” countries

and that “consideration will be given to countries with which there are close economic

and political ties and which, if appropriate, provide their taxpayers with sufficient scope

for regularisation” as quoted by the Swiss Federal Department of Finance. Reading

between the lines, the Swiss point of view on “transparency” is quite different from the

United States, and concerns arise on the fact that Switzerland is worried more about the

IRS and media scrutiny more than their actual concern with the amounts of cash inflows

and outflows of potential “dirty money” the Swiss multinational banking firms are

controlling. Switzerland’s banks appear to be lobbying the federal Swiss Finance offices

with leverage based on the most favorable and significant banking ventures for

Switzerland’s banking industry and overall financial economy.

While, Switzerland reiterates that it intends to have only bilateral agreements

regarding AEOI, Switzerland seems to be going the opposition direction which is in its

favor. 20 21 According to the Economist, the Swiss willingly giving account holder

information in an AEOI is the “cultural equivalent of American’s giving up guns”. 24

Despite the hardline, Switzerland has attempted compromises with the United

States and GATCA OECD members (which it is also a part of). Switzerland says it will

respond to “bulk” requests by foreign taxing agencies on anonymous clients of various

FFIs within Switzerland. Switzerland has promised to punish British and Austrian

citizens who evade taxes via Switzerland by giving names and increasing penalties and

withholding taxes on future equities income. 13

Yet, Switzerland seems at fundamental odds with its OECD brethren, including

the US, France and even Germany who all are increasingly angered with the Swiss over

its tax haven antics for their respective nations’ citizens. They have voiced their desire

in the past to add Switzerland to a “blacklist” of nations designated by the OECD as

“non-cooperative”. Countries on this list are at higher odds of being branded as high-risk

nations to do financial business and equities trading. These countries may have

exorbitant costs, punitive damages, and negative public image to deal with and may not

be able to undergo banking with OECD nations.37 Sanctions and blacklisting may not be

directly related. Moving forwards, major multinational banking firms that do business

with tax havens may be under serious compulsion to withdraw those links. The blacklist

is made by the OECD’s own Financial Action Task Force on money Laundering (FATF).

The threat of blacklisting has prompted tax havens such as Singapore, Dubai

(United Arab Emirates), the British self-governing islands of Jersey and the Caymans,

and even Panama to now unwillingly proceed with the exchange of financial data. 24

Even immensely populous nations such as India that are known for their own massive

bureaucratic red tape are also under duress because if India cannot sign FATCA, its

almost $80 billion dollars of the Reserve Bank of India’s (RBI) money in the form of US

treasury bond holdings can be levied fines which would prohibitively affect the Indian

economy and RBI reserves. If FATCA can influence a military power such as India and

India’s own monetary policy, then newly developed nations such as China, Brazil, and

Russia have reasons to worry about noncompliance. 60

Switzerland has “retaliated” in its own form of the FATCA/GATCA model called

“Rubik” while adding various unnecessary intricacies in Rubik’s potential

implementation. Yet in late 2012, Germany’s Senate has rejected the “Rubik” after

Rubik’s surprise approval by Germany’s House. 13 In layman’s terms, Rubik allows for

non-reciprocity and allows Switzerland to essentially hide Germans’ or other nationals’

account information within the jurisdiction of Switzerland. 26 The intent of Rubik was to

allow German nationals to continue holding Swiss bank accounts. These Swiss bank

accounts held by Germans were undeclared to the German Federal Central Tax Office

(BZSt). Rubik would implement additional withholding taxes on Germans who didn’t

want to reveal their funds to Germany and give reductions on levies for older accrued

wealth. 27

Despite German opposition the UK and Austria have accords in place through

Rubik. Austria and British nationals with accounts in Switzerland have the discretion to

either divulge their accounts to their nations’ tax agencies or to pay towards Swiss

Rubik withholding tax to ensure ambiguity. The Rubik accords dictate that long-term

assets should be in a different category other than cash flows and incomes. 27 Rubik

ensures account holders’ identities are concealed to their respective nations in return for

a withholding tax. Another reason for Rubik, says the Swiss nonprofit AFBS

(Association for Foreign Banks in Switzerland) is that Rubik would protect Swiss

accountants and multinational bankers in Switzerland legal protection from the foreign

nations’ taxing agencies. 27

Despite the fears of FATCA and the potential new implementation of GATCA,

Rubik is designed to keep Switzerland’s foreign-based assets in Switzerland and

reassure foreign accountholders to keep their accounts open. 29 What’s interesting for

all the “encouragement” that Rubik seems to be giving UK and Austrian citizens to hide

their money in Switzerland, its actually generating strong tax withholding revenues in

both nations. 28 The British finance minister George Osborne even said in early 2013

that “[This is] the first time in our history that money due in taxes has flowed to this

country from Switzerland, rather than the other way round," he added. Switzerland has

even transferred about almost a $1 billion USD as of July 2013 to the UK and Austria as

part of the Rubik accords to essentially fulfill the tax withholding requirement of the

concealed UK and Austria nationals’ accounts. These agreements were in effect since

January 1, 2013. Plainly speaking, this is a very high-level of “hush money”. Over the

next six years it is estimated that over £5 billion by 2017-2018 will be brought to the UK

alone from the Swiss Rubik accords. The Swiss Federal Tax Administration (FTA) wing

of the Swiss Department of Finance has made the “tranche” or first series of payments.

Despite the United State not having officially signing the authority agreement to

implement AEOI this past October, it is recommended by the OECD for US persons

abroad to be aware of the OECD’s CRS developments. The secretary general of the

OECD, Angel Gurria also says that despite its seeming obstinacy, the US is a “very

strong supporter of everything that we are doing” and Germany’s finance minister,

Wolfgang Schaeuble, even reiterated that OECD GATCA “would not have been

possible without FATCA, which was the trigger for our process.”

One of the major goals of FATCA was to provide an offshore reporting model

whether deliberately or inadvertently but whatever FATCA’s original intentions; it has

evolved to effect a global agreement to the implementation of GATCA. In fact within a

month of 51 nations signing an OECD pact to implement AEOI in, Switzerland, the most

stubborn and infamous of the tax havens signed AEOI-based GATCA standards as well

by will go under a common reporting standard by 2018. 81 According to Richard Harvey,

FATCA’s long-term implementation and staying power was necessitated on the world

agreeing with FATCA. FATCA in his words is a “marathon, not a sprint” and will require

a multilateral approach to be successful because the OECD’s influence is necessary for

compliance advocacy. The multilateral approach gives one powerful weapon in

preventing tax evaders from investing in foreign assets with Non-Participating Foreign

Financial Institutions (NPFFIs). Basically foreign investments are frozen or blocked.

Thus tax evaders will have to invest in smaller, less reliable financial firms. Investment

options will become eventually so limited, risky, and unreliable that tax evasion could

potentially be eliminated in theory according to Harvey. 81 FFIs may act as qualified

intermediaries (an FFI or other entity is permitted by the IRS to conduct reporting tasks)

and the risk that FATCA brings is that tax evaders may try to move their investments to

NQI (nonqualified intermediaries). Efforts are proposed to impose strict penalties on

NQIs consequently such as FATCA re-categorizing payments by tax evaders from

participating FFIs to NPFFIs as US source payments to incur tax liabilities onto

taxpayers and deter tax evasion furthermore. A unilateral approach is risky because a

US tax evader could put their assets in a NPFFI and convert their assets into non-US

assets thus escaping FATCA’s long arm. The risks for globally inspired GATCA include

GATCA taking several decades, not years, to implement. 81

FATCA has influenced GATCA and GATCA has influenced countries like

Switzerland to propose Rubik to preserve Swiss banking secrecy. Common Reporting

Standards which are the framework for AEOI/GATCA are necessary in the future as

other tax havens and developing nations look to fill their treasury coffers. FATCA is

being used a blueprint for most other nations, while countries like Switzerland are yet

cherry picking their options with regards with what FATCA and GATCA accords they

choose to agree to with the rest of the OECD while other tax havens are choosing their

AEOI options with partner nations. 32

FATCA does have predecessors such as the Qualified Intermediary (QI) for

encouraging honest tax reporting by US taxpayers by inviting them to automatically

report their income while ensuring their financial information being kept anonymous.

The EU Savings Directive is a term that has come up several times as influencing

GATCA and FATCA. The OECD’s CRS initiative is following the Savings Directive’s

template which includes a host of directives that was actually introduced in 2005 but not

all EU members were in concurrence. Perhaps because EU’s Eurozone was relatively

new back in 2005 or perhaps the EU nations were given until 2016 to adopt national

legislation to follow the Savings Directive is not for certain. But its lack of holistic

implementation since 2005 is clear. Evidently, the model for information exchange was

there in 2005 but has evolved into the AEOI now in 2014.

The UK’s tax agency (HMRC) has in 2014 written drafts regarding how the UK

will implement the UK’s own FATCA. The deadline is 2015 for reporting requirements. 32

The UK’s AEOI will be modelled on FATCA and will be seeking UK taxpayers who hide

their money in Jersey, the Isle of Man, and other British sovereignties. The long arm of

FATCA has definitely affected the level of UK scrutiny on UK non-compliance.

Switzerland’s Rubik agreements are so complex that there are doubts that Rubik

will be taken serious internationally and implemented because there is too much data

and too much tax calculation required. 34 The global nature of banking has caused

FATCA to have the major impact that it has now that it would not have had back in the

1980s’ or before.

Local Impact of FATCA

The US Department of Treasury has to fill the requirements of FATCA which

Congress has outlined in 2010 but really didn’t go into detail beyond the bylaws. Four

years later, addendums are being added and notices are yet being made.

Domestically, most Americans have never heard of FATCA (they do not really

need to) yet FATCA’s political impact could be felt because wealthy constituents may

not vote for the “pro-FATCA” agenda party. Political activist groups for Americans

overseas such as Republicans Overseas and Republicans Abroad have held meetings

with US Senators such as Mike Lee (R-Utah) and prominent US attorneys have been

publicly campaigning with other Senators such as Rand Paul (R-Kentucky) for its full

annulment. Democratic leaning groups have countered calling for rectifying some of

FATCA’s main points of issue and quickly passing legislation for innocent Americans

who are immediately and negatively impacted by FATCA. 41 Most of the money hidden

by Americans is not done by middle-class Americans but by the wealthy. Ordinary

Americans would thus have fewer restrictions by their “same country” and would have

local rights back unlike before with FATCA which stripped many Americans of local

banking options. Yet for all the negative publicity, the Democrats do not show signs of

wanting a repeal of FATCA.

Typically, American expatriates are leaning more left than right, yet the

Democratic Party seems to be staunch in its stance regarding FATCA’s

implementations. Signs of a 2016 election being affected by FATCA are getting stronger

now and really depend on the level of clarity or ambiguity of FATCA conforming to

GATCA’s implementation in the next few years. 41 44

Republicans did not vote for FATCA in 2010; FATCA was an exclusively

Democratic proposition. Multiple expats have foresworn the Democratic Party as a

result of the FATCA laws and have even written stories about being ignored or

dismissed by Democratic legislators in the United States. 41

American political parties usually have to cater to elderly voters as the largest

and most influential voting bloc in the United States. It is interesting to note that

FATCA’s stance on non-US retirement plan taxes makes exceptions for that bloc. The

essence of retirement plan taxation is fundamentally different than gross income and

net income for taxing authorities in the United States.48 Since non-US retirement plans

are not high risk for tax evasion, the IRS has decided to exempt those pensions from

FATCA reporting.49 Yet, non-exempt pension plans or those that are categorized in the

IGAs with new guidelines are still required to be filed with the IRS by May but changed

to July due to ongoing complexities and relaxing of compliance deadlines in 2014. 47

Asian preference for FATCA

FATCA has actually increased in popularity in several Asian countries who are

using FATCA to develop their own versions that follow similar guidelines. A Citigroup

Security and Investigative Services (CSIS) director from Hong Kong says that "A lot of

countries want to see where the foreign direct investment is coming from, because of

corruption in their own countries. It [funds] is going to offshore companies and coming

back into their own country. They want to know who that is and the only way to do that

is cross-border exchanges [of tax information]. " 52

FATCA’s recent announcing of its own standards to fight tax evasion is aiming at

the problem of Chinese money going overseas and returning as FDI from the West.

Simultaneously, Malaysia has also been a strong proponent of FATCA because

having taxpayer records could be used to help tax evasion investigations and Malaysia

is committed to an AEOI with the United States and others on the expectation of

reciprocity. FATCA’s global impact is limitless and the OECD’s AEOI will be in place

according to the Citigroup director by "every country to have a FATCA-type situation.

That is probably going to happen in the next 3-5 years." 52

FATCA legal remedies

For all the legal uproar over FATCA it is interesting to note that some older

Americans can actually remember a period of history during the 1970s where the USSR

charged an “exit tax” to Soviet Jews before they fled for Israel. The American

government led international sanctions to block this tax and was equally outraged by the

notion that Soviet Jews’ were taking their intellectual assets away from the USSR and a

“brain drain” was occurring at the expense of the USSR. Today’s FATCA-inspired exit

taxes are much more impactful (up to 30% on capital gains) and far-reaching than the

Soviet ones. 82 90

In fact the US Treasury Department has made strides to soften FATCA’s image

and present it in an encouraging light. In May 2014, the Treasury Department with IRS

support announced that it will willingly consider “good faith efforts” by foreign banks to

acquiesce with FATCA over the transition period from 2014 to the end of March 2015

despite FATCA taking effect July 1, 2014. During this time, “good faith” can be legally

used in courts and with IRS agents to avoid penalties. The Treasury and the IRS require

reporting for all US holders’ accounts to be revealed by the end of 2014 for calendar

year 2014. Several measures have been put in notices by the Department of the

Treasury to help FFIs to comply with FATCA in a prompt method. 76 Financial data

traded by partner tax agencies and nations under IGAs in 2015 will be called to include

only information related to the 2014 calendar year providing a lesser reporting burden.78

The IRS will take into consideration the amplitude to how much an IRS

“participating or deemed-compliant FFI, direct reporting NFFE, sponsoring entity,

sponsored FFI, sponsored direct reporting NFFE, or withholding agent” has attempted

to follow FATCA requirements in accordance to the United States Code Title 26-IRS

Code, Subtitle A-Income Taxes, Chapter 4-Taxes to Enforce Reporting on Certain

Foreign Accounts in good faith and temporary codification regulations.

The United States Code (USC) contains the general and permanent laws of the

United States, catalogued into headlines based content matter.65 Meanwhile, the CFR is

the “Code of Federal Regulations is actually the codification of the general and

permanent rules published in the Federal Register by the executive departments and

agencies of the Federal Government published in the Federal Register” according to the

Government Printing Office (GPO), the agency that prints the official journals of the

government. 67

An example can be whether the withholding agent has made good faith attempts

to authenticate and inspect the USC Chapter 4 status of payees (26 CFR § 1.1471-

3 Identification of payee), apply Chapter 4 USC rules, and in case of a dearth of

reporting data at real-time, to follow presumption rules of the USC and CFR.

Presumption rules are applied to ascertain the status of a payee who may not have

valid documentation to avoid liabilities for tax, interest, and penalties. The status can be

such as in case the payee is an individual, corporation, partnership, or trust. Different

statuses have different withholding rates. Relief and exemption from liabilities is

available only if presumption rules are followed even if the payee does not reliably know

the actual status and actual withholding rates. 66

The IRS will not give relief to certain FFIs and payees who did not regard specific

requirements in the past few years prior to the transition period and who did not follow

the various USC code rules for withholding. Examples include relief relating to

withholding agent’s taking too long to determine their accounts and sources of income

for withholding and payment reasons. With that being said, the IRS has consistently

modified its due diligence, reporting, and withholding rules over the past four years

since FATCA was introduced and as of late 2014 has no patience for those payees who

are “just now” realizing the requirements.68

The IRS is open to “compliance errors” detected as long as there is the

aforementioned good faith effort to comply with FATCA by an FFI according to a tax

partner at the global law firm Latham & Watkins LLP in Washington DC. 64 According to

the same partner, failure or negligence to implement and seek compliance along with

deliberate withholding will very likely lead to severe withholding sanctions. 64 According

to the partner, FFIs should use their legal departments and tax experts to contact the

IRS, DOJ, and their local tax agencies to best reconcile potentially conflicting

information on compliance. FFIs should make FATCA enforcement a top priority for

their short term and long term forecasts. 64

An international tax law lawyer from Dechert LLP has said “Companies worrying

about how to comply with FATCA will welcome this latest round of relief.” The US

Treasury has insisted that the recent soothing and slowing of FATCA implementation is

mainly because many FFIS under foreign jurisdictions and FATCA guidelines were not

syncing so FATCA registration obstructions had to be eased. 54

The Department of Justice has in the past summoned identity information for

UBS Swiss account holders and once those names were disclosed, the IRS publicly

listed the prosecution of dozens of UBS clients and bankers. Severe criminal and

monetary penalties of almost $800 million ensued for UBS and for who did not disclose

their previously confidential information.63

Despites Congress’s intention’s 2010, according to the Latham & Watkins

partner, FATCA cannot last unilaterally and is best designed as initially implemented as

a reciprocal attestation system. With the continued implementation of FATCA IGAs

imminent, AEOI is expected between the US and foreign countries. 64 Limited reliefs for

certain types of account holders have been put into place by the IRS allowing for

deadlines extending into 2015. The IGAs’ sets of financial data of US accounts vs non-

US account information are going to be reviewed and consequently revised if

necessary.

FATCA defenders can hitherto cite a GAO finding was that the median account

balance of the 2009 OVDP taxpayers was around $570,000 of over 10,000 reported

cases. 89 These findings were perhaps the basis of one unnamed Congressional

member to defend FATCA saying that many expats were “misinformed” about the reach

of the law and those who are potentially immune to FATCA’s reach. His argument was

that since reporting requirements are only for accounts worth over $50,000, the vast

majority of overseas taxpayers would not be subject to FATCA’s laws in the past,

present or in the future. Many are simply “unaware” of the minimum threshold and the

media and FFIs are only adding to the uproar because the people who would be

“affected” have the “strong incentive not to point out the distinction”. 88

Green Card holders and Lawful permanent residents abroad

Legal remedies and individual impacts by FATCA on US-related persons’ have to

be examined more closely since they are more far-reaching than previously thought. As

mentioned earlier in individual impact to FATCA, FATCA applies to permanent

residents, green card holders, and spouses of citizens abroad. New immigrants to the

United States who leave the United States are not exempt as well. The IRS will fight

those who deliberately try to cheat the system or try to deliberately minimize taxes using

bilateral treaties’ as a way to find loopholes. Green card holders who think they can

plainly leave and not return to the US and are free of US tax liability and obligations to

FBAR and/or FATCA are mistaken.

A practical application of this potential scenario is the recent decision (TOPSNIK

v. Commissioner of Internal Revenue) by the federal trial court for tax, the United States

Tax Court. The Tax Court decided that an “informal surrender” of a US-related persons’

Lawful Permanent Residence (LPR) is not recognized for tax laws despite being

recognized for immigration purposes. 85 Basically a nonresident alien who is not legally

entitled to permanent residency will still be resident for tax purposes because the alien

has not “officially” foresworn their LPR status. 96

The taxpayer in question had been living abroad for quite some time and had

only recently relinquished his LPR (green card) in 2010 which had exempted him from

German taxes as a German resident. He remained an LPR despite having sold his US

properties prior to 2010 so was still liable under US taxation. The taxpayer’s notion that

he “informally” abandoned his LPR status because he left his US residence in 2003 was

rejected by the court because his tax liability was related to his immigration status. 96 He

actually used a prior immigration case that used “informal” abandonment in the trial. The

court decided however that the taxpayer, Topsnik, could not simply make so many

infrequent US visits and sell his Hawaii home to lose his status according to a House

Ways and Means Committee report attached to under United States Code Title 26-IRS

Code Subtitle F-Procedure & Administration-Chapter 79-Definitions-Code Sec.

7701(b)(6) . In fact, the German tax agencies had no record of Topsnik filing his taxes in

Germany despite being registered with German tax authorities.98 His appealing of a

US-German treaty in his arguments was revoked in court because he did not fulfill the

“Treaty Test” obligations meaning he must be taxable on his worldwide income to

Germany if he not a US resident as he “claimed”.

If the petitioner, Topsnik, wanted to formally “surrender”, an official renunciation

would involve filing form I-407, Abandonment of Lawful Permanent Resident Status, to

the USCIS (United States Citizenship and Immigration Services) would have to be filled.

The Topsnik decision is far-reaching and makes it clear that Green Card holders cannot

simply leave the country and be exempt from tax liabilities. 85

Asides from the OVDP, the IRS offers the newly minted “Streamlined” Program

started in 2012. Under this program the taxpayers are exempt from penalties and the

program is cheaper to undertake than the OVDP. Typically, the IRS stance on U.S.

taxpayers under Streamlined is that they have failed to file their tax obligations in a

“non-willful” manner. But these taxpayers are allowed to send these simple returns

because they are “low risk”. It is important to note that the IRS does not consider tax

returns owing less than $1,500 to be material enough to be anything but “low risk”.

Instead of paying up to 50% or more through the OVDP, Streamlined participants pay

only 5% of the highest balance of the OVDP assets. Under “Streamlined”, non-resident

Americans pay no penalty. 97 99

The “quiet disclosure” method mentioned earlier is not recommended by the IRS

because filing amended tax returns and past due FBARS is considered “quiet” if the

taxpayer is filing without partaking in an IRS program. If a taxpayer does this thinking

they won’t attract attention, the IRS will pursue criminal charges in addition to monetary.

To the IRS, “quiet disclosure” is the same is no disclosure. 93

Quiet disclosure and prospective basis can yield far worse penalties than the

27% to 50%, as willful (“act done voluntarily with either an intentional disregard of, or

plain indifference to”) violations can be $100,000 or 50% per account, or furthermore

$250,000-$500,000 in criminal penalties and prison ranging from three to ten years.92 93

95 One example of willful noncompliance was an elderly Florida man, Carl Zwerner, who

owes 150% of his foreign Swiss bank account worth over $2 million because he failed to

file several past years of FBARs and put “No” on his tax forms while maintaining

different entity names. The IRS is seeking almost $3.5 million from him in penalties, and

a jury has upheld the IRS in court. There are discrepancies in the case where Zwerner

tried to join the OVDP in 2011 but was denied because he was under audit during that

time. 94

The current legal status of a resident alien such as Topsnik arises the question

as to whether a person residing overseas be exempt from being liable to FDAP (Fixed,

Determinable, Annual, Periodical) income if they no longer have legal rights to live in the

United States while also being offered the protections of the United States overseas as

non-resident Permanent residents? 84 The US tax authorities have found that

compliance levels for reporting are low for overseas citizens and want to reaffirm the

question of how many FDAP income dollars are sent abroad to nonresident citizens and

aliens with no withholding liabilities. Their non-filing is the source of the question as to

who will pay the millions or even billions of dollars of lost tax income revenue on their

FDAP income. FDAP is defined by the IRS as passive investment income stemming

from dividends, interest, rents, royalties, and is considered separate from business or

trade income in the United States. One disturbing proof of the finding is that almost only

about 19,500 ODVP 2009 participants in slightly over 10,000 cases paid an average

penalty of nearly $400,000.101 Over half of the FBAR filing by 2009 OVDP participants

was done from Switzerland alone and over half of the $4.1 billion collected at year-end

2012 was from less than 400 participants alone. 100

The GAO shows discrepancies in the proportion of revenues received from

offshore taxpayers who made $78,000 or less (lowest 10th percentile) paid almost

“575% of the tax, interest, and penalties on their unreported income.” 102 Astoundingly,

the share paid by the top 90th percentile was only around “86 percent or less”. 102

This means over half of the collections from OVDP taxpayers who paid are from

only 2% of all the total offshore disclosing participants. But also, many ultra high-net-

worth individuals are among the many who didn’t pay. Many more noncompliant

persons unfortunately are working class and lower middle class US-related persons

abroad as well. The GAO and TAS show that benign actors are those who owe $1,500

or more but inadvertently fail to report their overseas earnings are unfairly classified as

“bad actors” by the IRS. Unlike benign actors, “bad actors” are designated as those who

intentionally evade taxes by hiding substantial liquid assets and equities in offshore

accounts.

The data is nearly five years old but the GAO is correct in asserting its

applicability for subsequent OVDP measures by 2014, that the IRS and Treasury’s three

subsequent OVDP programs subsequently have generated revenues but are glaring

examples of missed opportunities. 83 Despite the missed revenues, legally, OVDP and

FATCA have been overreaching. In fact, the head of the TAS, Nina Olson, said in her

annual 2013 report that the OVDP has “burdened ‘benign actors’ who inadvertently

violated the rules”. 103 She has stated that the penalties have been “punitive, charging

average penalties of more than double the unpaid tax and interest associated with the

unreported accounts”. While new programs such as Streamlined are fairer and more

flexible, the overall fines are reaching almost “70% of the unpaid tax and interest” Olson

adds. Her reports are annual requirements to Congress required by law to highlight

serious IRS taxpayer concerns. While dozens of the TAS’s propositions have been

discussed, only a handful have been fully approved and followed. 104

FATCA White Papers

One of the most challenging requirements of FATCA is the technological

implementation of due diligence processes required to determine FATCA reporting

status of the FFI’s clients. Currently, FATCA research requires combing through

multiple sets of client data which is usually gathered in disparate databases in different

reporting formats within multiple line-of-businesses due to the client differences,

complexity of multinational FFIs, and various jurisdictions’ compliance. If FATCA

implementation is done right, almost every function within an FFI will be affected; thus it

must be implemented with minimal adverse impact to the business and clients.

According to the global analytics giant, SAS Institute, FFIs need to put into place

processes and IT systems around three wide-ranging spheres of FATCA. 108 109

The first is documentation which will gather the clients’ data and monitor any

taxing regulation changes and analyze the clients’ data in accordance with regulations.

The second is withholding, allowing the IT systems to recognize and develop tools for

“recalcitrant” taxpayers specifically. Lastly, the IT systems need to have a fully-

functional reporting model for US persons to hold their source payment data and

withholding account balances.

This endeavor would require upgrades and retooling of existing systems, such

as KYC/AML systems and databases. New operational systems such as SAS Data

Management and Master Data Management software are designed to identify US tax-

liabilities at the point of onboarding. 109 Onboarding involves several important activities

for new bank clients including credit process compliance, legality terms, enabling the

client to the bank’s features, and all trading systems are set up. New data mining tools

that dig deeper would be needed to ascertain the relationships between accounts using

a data-mining concept called “link analysis”. The highly accurate automated customer

identification workflow will seek US indicia (identifies account holder as US-related

person, US residence address, US birthplace, account based in US, US-based power of

attorney, and “hold mail” US address) and integrate that information with the business

processes and systems of that company. This concept is needed to mature and tested

furthermore. The FFIs must certify that the systems are ready to supervise and audit

account relationships using link analysis while monitoring account status’s under

FATCA with regards to withholding and reporting. 108 109 Operational systems like SAS

are worth the upgrade for they provide “automated, pre-populated, IRS reporting”

capabilities. This information fills forms and is sent to the IRS at the taxpayers’

discretion. A centralized case management system provides a common repository for

crossover data from different departments and channels within a FFI and shared

workflow tools to allow tax investigators easier access to information and reducing time

and efforts to examine tax data. 106 108

While FFIs, have already millions of dollars of software systems to maintain

internally this only adds to the reporting costs and maintenance. 106 It is important for

FFIs to plainly designate and determine what is needed to prepare current legacy

systems and processes for retooling, updating, and compliance. By finding

inconsistencies and inefficiencies in the current legacy systems, FFIs can use FATCA

and modern software systems to enhance their own existing systems by linking

databases, systematizing data, and packaging FATCA workflow covering automated

FATCA classifications. 107

Respectively for achieving FATCA compliance, firstly FFIs are recommended by

the multinational consulting firm Tata Consulting Services (TCS) to modify their IT

systems starting with their updating their existing KYC/AML processes to conform to

FATCA’s client-data gathering, verifying, and updating of processes. According to a

senior executive at Foodman & Associates in Miami, “FATCA adds an additional layer

to the KYC and AML processes that financial institutions currently have in place, but to

a certain extent it is complementary”. 110 Due to the aforesaid multiple lines of business

that customer information is classified under, the upgraded IT systems must present a

FATCA “Single Customer View” of a client across an FFI and this requires system

alignment.112 Enhanced CRM (customer relationship management) systems would be

ideal to fill this role, since they are used in the financial services industry already

housing KYC, onboarding, householding (aggregation of all household accounts), AML,

and other client financial processes within themselves as a central platform of

recordkeeping. 111 106

Secondly to achieve FATCA compliance, data processing and other analytics

tools are needed to data mine and find FATCA clients. The clients’ indicia needs to be

run through the system to cross-reference for withholding and reporting purposes. Data-

mining tools will have to be able to “link” disparate data and determine the clients’ profile

from the data. Once this process is fine-tuned, the efforts for FFIs and taxing authorities

to contact clients and pull up their data will be streamlined and efficient. 106

Thirdly to achieve FATCA compliance, data warehousing must be upgraded to

collect client data across multiple business lines and account types to facilitate accurate

account transactions. A FATCA operational data “store” (single data repository) is

recommended to aggregating (capturing) information from multiple sources, onboarding

the big data, and delivering it for individual and wholesale clients. 106

For their IT systems, FFIs would need to levy withholding taxes on payments on

US source income and passthru (payments going to NPFFIs) payments on

uncooperative accounts. Correct determination of liabilities is required for the payment

systems in addition to a record of the withholding process for future reference. In

addition to keeping record of withholding transactions, records of withheld amounts to

escrow accounts could be located with new IT systems. 106

Fourthly to achieve FATCA compliance, trading and settling systems would have

new features to allow determination of uncooperative accounts through the enhanced

due diligence procedures and withholding taxes would be enforced on these accounts.

The complexity of the system is weaving through the transactions between clients,

brokers, and clearing agents (of financial securities trading house) in the trading and

settlement process. The correct determination of the legal taxing entity that is seeking

the tax penalties is another challenge. If this system is not upgraded, future risks in the

settlement of commodities, derivatives, and securities among all US-related persons is

at great risk and poses serious economic ramifications. 106

And in the final TCS recommendation, FATCA would require FFIs to build a new

reporting system to disclose details of US related persons and uncooperative accounts.

The various details include “account balances, gross proceeds, withholding tax

penalties imposed”. Internal reporting would be needed to be shared with tax

compliance agents and FFI investors. The long timeline for FATCA implementation

gives FFIs time to create new reporting systems and the companies who spend the

extra exorbitant costs now can reap the long-term potential benefits by saving their

clients’ money and “future-proofing” their business financially. FFIs can gain competitive

advantage from FATCA compliance if they have a wider scope and method to

compliance by balancing Information Technology Management challenges with “big

data” complexities. To obtain long term cost savings on FATCA, FFIs should also

involve teams of FATCA tax experts with ITM experts, preferably consultants form large

firms that specialize in IT systems implementation.107 Enhanced IT systems will

inherently have the flexibility to accommodate future FATCA implementation regulations

and modifications. FATCA allows firms to redo their client onboarding process and

these upgrades will stem beyond FATCA and allow FFIs to update their systems for

future KYC and AML requirements as well. 106

Technological Implementation Categories

The technology to implement the process of gathering and analyzing disparate

sets of “big data” can be applied in numerous comprehensive ways but three technical

implementations stand out. If these technologies are used wisely, transactions and data

gathering will become “leaner” and more “agile” in responsiveness.

As mentioned earlier, enhanced KYC/AML and CRM Systems are needed for

more “agile” IT systems to handle FATCA compliance. Specifically, a web-based

service should be implemented to allow clients to share and update their financial data

in real-time. This system would be tailored to the aforesaid “Single Customer View”

whose goal is to maintain the least possible interruptions to the FFI’s operations. The

Web-based service tools are going to be laid out in a digital form-based framework and

design. These Web-based service tools would allow clients to supply their FATCA

reporting data and minimize the turnaround times and limit manual reworking of

potentially inaccurate and inconsistent data. Self-service tools are attracting new clients

because they allow for easy access to FATCA reporting data when they are

commencing their reporting or adding additional components to their existing data.

Features including full audit histories allow for building complex reports. All aspects of

FATCA implementation processes are fully configurable with configurable workflows.113

Before the advent web-based service tools, the implementation of “link analysis”

is perhaps the glue that holds the rest of FATCA enhanced IT systems to work. Link

analysis is a form of data-mining which will converge traditional methods such as

phone, email, and postal mail and provide additional in-depth analysis from the new

data using intelligence tools. Specifically speaking, link analysis IT systems are

designed to help FATCA compliance by performing detailed analyses on customer

records, holding documentation on new clients, and reporting to taxing agencies on any

reporting transactions between taxpayers and agencies. Link analysis solutions have an

“end-to-end” goal covering FATCA. The “big picture” goal is not to just organize data but

turn the multiple sets of data into one complete montage or “painting”. Typically clients

leave a “breadcrumb trail” while working with taxing agencies and within their FFIs.

Change of property addresses or title holders may have been changed from when a

taxpayer is securities trading on the open market or requesting tax forms due to

updated FATCA guidance. Those “indicias of ownership” may not be the same now as

when the client had opened their reporting account. Link analysis curtails the

painstakingly cumbersome task of grouping clients with FATCA sections. 113 If link

analysis is implemented into the IT systems, it can highlight documentation errors on

due diligence and correct those for FATCA compliance. 113

Lastly, while seemingly less pertinent to FATCA compliance, online surveys can

actually allow firms to aggregate informational internally within the various sections of a

company and across multiple vertical and horizontal channels. Firms can gauge

FATCA’s ongoing and future breadth and brunt on their business. Surveys are generally

quick to execute and relatively less time-consuming and while being extremely low-cost

in comparison to other forms of implementation. They will erase the need for companies

to spend the money to physically collect this information, thus saving time and money.

113 For firms that unsure of their FATCA information-gathering protocol, client “big data”,

and FATCA source payment methods these surveys allow these FFIs to gather and

index the nature of the data. For large multinationals, huge volumes of “big data” is

needed to be stored across the many working businesses, subdivisions, and global

regions of one. Survey questions must be specific to “cater” to the needs of individual

subdivisions with questions about “types of clients”, “clients per division”, “company

registration”, “source payments”, and “outsourcing functionalities”. 113

Successful FATCA implementation scenarios

A certain clarity to envision what new policies, procedures, and tax training is

required to successfully implement what is needed for the right frame working of FATCA

systems and controls. Case-studies do not exist to determine the development of IT

systems with enhanced FATCA reporting capabilities since the implementations are so

recent. The implementation investment is almost an act of “blind faith” and necessity out

of FATCA’s compliance requirements. A balancing act is required for most

organizations, since most have already spent millions on their IT systems and would not

seek to spend much more on an unproven and timeline-indefinite enhancement. FFIs

should leverage their existing “legacy” systems and allow facilitation of the new IT

system in an independent platform that can cross multiple systems. 107 Large firms

using SAP as their ERP for Finance and Accounting but Salesforce CRM or Oracle’s

PeopleSoft (for Human Resources) applications and modules for other functional areas

in their company will need to consolidate their systems for large-scale solutions. A

seamlessly integrated ERP system would allow FATCA enhancement. A seamless

integration of ERP systems and modules would permit multiple “modes” of “big data” to

be arranged according to different input and output formats so linking data sources

could become “efficient”. A FATCA enhanced solution should be able to access and

make available multiple windows of the client’s position within a single view without

adversely or mistakenly impacting the processes of other various applications. 107 They

should be run virtually and operate as a global platform allowing data to be held and

transferred amongst various jurisdictions. 107

Well-functioning FATCA internal controls IT systems have capabilities that must

be viable and in working order for FFIs to conduct proper onboarding processes using

FATCA indicia criteria. The criteria (US persons, Non-US persons, and uncooperative

persons) must be carefully indexed and integrated into the KYC and onboarding

processes to ensure lower cycle times, ease the burden on IT staff, reduce

inefficiencies and data redundancies, and lower IT costs. New FATCA systems and

their features can be added to existing KYC, AML, and onboarding processes that FFIs

have in place which are automated within CRM software. 111 The improved processing

from enhanced FATCA internal controls will allow for more thorough FATCA client

onboarding, quicker detection of reporting errors and better automated workflows. An

example of using FATCA data as part of the KYC within the CRM is if a client does not

show proof of address, an automated workflow rule can deliver a W-8 tax form and warn

the FFI that they further risk harboring uncooperative individuals who will be penalized

with withholding fines. The complexity of FATCA IT systems is trying to build customer

data capturing, automated workflows, and FATCA data reporting outside the already

established framework of a FFIs’ legacy systems such as CRM application software. 111

Software analytics developers like SAS have multiple capabilities in

implementing FATCA compliance for FFIs. Large multinationals software platforms like

SAS which focuses on advanced analytics and SAP which focuses on enterprise

software and business data have the large-scale experience to deal with “big-data” and

categorize data to reach “high-quality” alerts at low “false-positive” rates. SAS’s recent

collaboration with SAP’s fast in-memory HANA Cloud platform (considered the

successor to current generation SAP R/3) to develop high performance analytics

strategies could be useful for FATCA implementation in the future. These advanced

processes which will further help develop future IT systems for potentially analyzing

FATCA data instantly without IT wait times and allow a user to ask FATCA-based

“iterative” questions.

Currently, SAS’s solutions for its FATCA clients include advanced analytical

capabilities proficient at determining whether tax liabilities exist at the client’s point of

onboarding with an FFI. SAS also offers data integration solutions in the form of an

integrated operations two-way communication system (workbench) with prearranged

FATCA workflows. 109 116Prebuilt IRS reports and e-filing is another feature that is future-

proofed by allowing easy configuration and customization of the workbench to meet

future regulatory changes and requirements. 109 SAS’s FATCA solution is marketed as a

low-cost business intelligence platform creating and upholding custom reports and

queries. To minimize “total cost of ownership”, SAS allows for its systems to be

customized to match the existing legacy system of an FFI. Furthermore, the interactive

single view dashboards allow for drill-down capability which in IT users can go from

general views to specific views. An example would be FFI clients’ FATCA address will

show the country if they have multiple accounts, then will show the state or province,

and then by what jurisdiction and banking firm they use as well. Going deeper into the

specific layers of the data can help build a detailed report.109 116

Risks of new FATCA systems include onboarding of existing client counterparties

and that might be added to existing workflows and IT systems in an inefficient and

hindering pace. 117 Having the correct system architecture is important to successful

FATCA IT systems. In fact, Fircosoft is another FATCA IT systems vendor who

introduces technology solutions that perhaps address FATCA noncompliance risks such

as sanctions by governing agencies for FFIs regarding their AML and KYC reporting.

For Fircosoft, FATCA is already so closely aligned with KYC that Fircosoft only had to

make FATCA requirements an addendum to its existing solutions or KYC/AML. KYC

capabilities are already considered an initial marker as to determining liable clients.117

For successful FATCA implementation updating the existing onboarding

procedures and analyzing current client accounts should be considered as separate

processes. 118 Large FFIs should enhance their IT systems to be responsive and ready

for FATCA and new clients’ onboarding procedures while having separate workflows to

analyze existing accounts. Many FFIs with enhanced IT systems for FATCA

implementation are able to collect the required data sets and documentation for filing.

The FATCA-related data sets have points that can be mapped and exported to the FFI’s

new onboarding systems to ensure consistency between pre-existing accounts and

current FATCA onboarding procedures. The analysis of existing FATCA data requires a

workflow to analyze the millions of accounts consistent with FATCA guidelines. Pre-

existing data must be properly linked to counterparties and managers. Queries of

information and location of electronic and paper data must be easier to access. Pre-

existing data must be able to export data for real-time analysis. 118

Yet, sifting through and analyzing millions of documents and accounts can take

significant time and cost exorbitantly. Onboarding systems provide pre-existing

workflows, functionalities but many times that is limited thus making relying on

onboarding solely very risky. A unique approach handling the discrepancies between

new and current account FATCA data requires simultaneous updating of procedures. A

critical decision lies in whether to centralize, decentralize, or implement a hybrid system

to implement FATCA. For any FFI, a customized approach is best suited for its

individual needs. An example of a large FFI decentralizing its onboarding procedures

while using centralized pre-existing account data may be ideal for a firm of that scale.

Decentralized implementation may be best suited for FFIs with multiple business lines

and geographic regions. However after further review by Navigant Consulting, already

existing data is optimal when implemented centrally for several reasons. Firstly, there

are no process changes since FATCA is a recent law. Another is that there are similar

business requirements for already existing FATCA and KYC/AML data despite various

business lines and global regions within an FFI. To ease the certification of the FATCA

analysis and reporting, a centralized approach would streamline the data for the

individual auditing agencies and agents. It will take more research, analysis, and testing

by consulting firms such as Navigant as to which approach is best for FATCA

implementation for FFIs. 118

FATCA- Proposed Solutions

Participating and non-participating clients who are willfully reporting on time or

late have a host of IRS programs to choose from. Ironically the significantly greater risk

is with willful reporting (rather than non-willful); if the IRS suspects you’ve been willfully

non-reporting for several years or more. The IRS has the resources and tools to find out

whether the tax client has been paying their withholding amounts in a timely manner

and exact amounts. Ignoring the IRS is a huge risk and much more daunting in the long-

term than the short-term task of doing IRS paperwork. 119

A way to counter unfair tax liability on lawful permanent residents who live

abroad is to put in place a system where those individuals could record whether they

have lost their right to reside in the United States via their visa status and they are

currently not US “resident aliens” for tax purposes.84 This process would streamline the

legal process. A Residence Based Tax (RBT) could potentially solve FATCA’s major

issues including double taxation and reporting, FBARs, capital gains tax, retirement

savings tax. RBT will bring in much more revenue than FATCA because it encourages

compliance and does not scare away US-persons. A RBT program will be easier to

implement since it can be implemented to automatically collect reporting from long-term

nonresidents ensuring lower administrative costs. American firms and individuals can

thus invest more overseas and conduct trade while exporting goods more. Getting the

US congress getting the legal taxation bylaws writing Senate Finance Committee and

House Ways and Means Committee is crucial to getting FATCA reform done. 120

In FY 2014, the advocacy group TAS, continues to independently defend those

who non-willfully made errors with their IRS OVDP applications. The TAS recommends

to the IRS to stop needless taxpayer “fear-mongering” for those who “non-willfully” failed

to report foreign accounts.

Moving forward, the Taxpayer Advocate Service will continue to support and

defend non-willfully delinquent taxpayers through the multitude of programs the IRS

offers for FATCA reporting. The TAS is planning to speak to the IRS on reforming its

current regulations within various programs such as ODVP and how ODVP,

Streamlined, and other programs will harmonize with FATCA and GATCA moving

forward. The TAS will champion for the IRS to ratify more justifiable and legally

amenable policies to recover lost credibility amongst US nonresidents, the media, and

various foreign entities. The TAS’s main mission is to construe FATCA as a voluntary

compliance mechanism intended to benefit taxpayers and counterparties. 102 The

potential for the Streamlined Program to develop further and be promoted as a flexible

and attractive program for reporting is imminent and the TAS wants to capitalize on that.

One way to improve the public discourse is by requesting forum comments and

publishing relevant guidelines in the official “Federal Register” with revisions that include

recommendations from the public. Changes to the official tax forms such as “Report of

Foreign Bank and Financial Accounts” (TD F-90-22.1 by FinCEN) and Form 8938 by the

IRS, “Statement of Specified Foreign Financial Assets” are continually occurring to the

benefit of taxpayers and will help reduce anxieties. The TAS will continue to monitor the

progress of these events and report the changes to Congress in its annual reports.102

Some of the specific changes by the TAS to the IRS are soft notice programs to

encourage benign “actors” to rectify their inadvertent violations without leading to

significant time and fiscal constraints to the IRS and foreign auditing agencies as well.

Subsequently, reforms would allow the IRS to focus on willfully noncompliant

participants.

The first of many soft recommendations is to expand and clarify the Streamlined

Nonresident Filing Initiative to encourage benign actors (including those who owe more

than $1,500) to correct past noncompliance by using clearer measures that reduce IRS

expenditures. The IRS must take measures to define who qualifies under this soft

initiative and who will be considered a more serious, or “hard”, participant. Secondly,

“soft” notices should be distributed at a larger scale to inform foreign residents about all

of the IRS’s measures are needed for future compliance, encouraging willful

compliance.

Additionally, clarifying and separating benign actors from recalcitrant actors into a

set of guidelines is a key objective for 2014 and onwards. Past programs by the IRS

such as the FBAR Compliance Initiative Project and the FBAR Stop Filer Program were

unsuccessful in generating international taxpayer trust and thus cancelled. For the

Project, almost 25% of IRS mail to addresses was undeliverable while the Stop Filer

Program was perhaps perceived as a “too gentle” of a reminder because it targeted

those who had filed in the past year but not in the current year and the results of both

initiatives were not considered meaningful due to the small and non-statistical sampling

of the programs.

Future reforms must avoid the blunders of these past programs. 103 121 Future

self-correction for non-willful compliance is another recommendation that should be

implemented in the “soft” notices and marketing. Finally, another recommendation is

based on retirement plans as mentioned earlier; foreign retirement plans are not

consider high-risks for tax evasion but still require reporting. Foreign retirement plans

such as those from Canada create additional risks for US persons who have them.

Filing US taxes poses a new set of problems for those persons because the IRS’s

issued guidance on those with Canadian accounts earning additional income by linking

that income to US income tax returns. 103 The recommendation is to correct and refine

guidelines to recipients on how they can file corrected forms that allow for correct

representation of their income from those plans (tax status election). 103 Errors such as

those with Canada’s plans come from incorrect revenue procedures (Revenue

Procedure 2002-23, 2002-1 C.B. 744). The formal guidance from the IRM was

inconsistent with the Revenue Procedures causing severe burdens and potential

penalties for those US persons with Canadian plans. 103 If the taxpayers are late, the

IRS refuses to accept reporting unless the taxpayer can obtain a PLR (private letter

ruling) which costs significantly and takes time in courts. The PLR is defined as “a

written statement issued to a taxpayer that interprets and applies tax laws to the

taxpayer’s represented set of facts. A PLR is issued in response to a written request

submitted by a taxpayer. A PLR may not be relied on as precedent by other taxpayers

or by IRS personnel.” The PLR is binding only the individual and the IRS.

Nonetheless, the TAS admits that FATCA implementation is ongoing despite

being announced in 2010 for to be effective by January 1, 2013 and kept getting pushed

back every 6 months all the way to July 1, 2014. In its most recent report (2013) to

Congress, the TAS is concerned that the IRS is still not developed FATCA-specific

guidance to help all benign actors to explore their options and obtain assurances for

relief from penalties for having been non-willful participants. In addition, the TAS states

that a suitable system for noting reporting errors by FFIs with respect to US persons is

needed. Despite the IRS’s involvement in implementing changes to its FATCA guidance

moving forward, the IRS does not completely heed the advice of tax professionals who

have considerable FATCA concerns. Preserving due process rights of taxpayers is an

important goal while ensuring that US persons have adequate tools to address FFI

reporting errors and misinformation from counterparties.

FATCA has enough global financial sway that it can strain the global tax

agencies by taking away their resources and time towards inefficient research on non-

willful participants rather than recalcitrant ones. 122 A substantial risk exists in that

FATCA relief is only feasible in “theory” but not applied in time for non-willful participants

moving forward. Leniency over the past four years of FATCA has caused the IRS to

become aggressive moving forward towards “bad faith” actors. Future application of the

US Code Title 26 may be disproportionate to the level of nonparticipation such as the

penalties applied to Carl Zwerner. The TAS and IRS need to work together to prevent

the development of these occurrences form becoming permanent protocol. 122

In its latest Fiscal Year 2015 Objectives report to Congress, the TAS states that

the IRS will continue to focus on implementation of FATCA from the IT resources

standpoint. Currently according to the TAS, the IRS is understaffed and overwhelmed

on IT systems implementation of core FATCA processes. Because the IRS IT labor pool

is slim, the IRS moves a slower pace than FFIs and US persons abroad need in our

modern business cycle pace. 114 Current global GATCA efforts and unanimous AEOI

compliance is the consequence of US-initiated FATCA. FFIs need to have reliable long-

term FATCA solutions rather than short-term “fixes” because as FATCA is increasingly

global over the past half-decade, long-term financial challenges exist for FFIs who

invest deeply in FATCA compliance IT systems. The FFI’s credit worthiness and other

“cost of capital” ratings such as brand equity and profitability are potentially adversely

affected by severe penalties for willful and even benign non-compliance. Taking

educated steps to accomplish comprehensive cost-savings and timely reporting is the

key to gaining competitive advantage and future-proofing. 107

Finally in its 2015 recommendations, the TAS suggests two unique ideas, one

being where the IRS explores the use of VOIP (voice over internet protocol) and other

technologies that will allow nonresident filers to stay in communication with the IRS

without paying international phone bills as mentioned earlier as one of the major issues

concerning taxpayers in their frustrations with the IRS. Continuous upgrades are

needed to preserve the improvements with FATCA international communication

limitations. The TAS also suggests that to resolve the burden of the OVDP penalties on

non-willful participants is by introducing a “3-tiered approach” where firstly full relief

exists for those who underreport under a specific “threshold” amount. The second is to

enforce future penalties for non-will taxpayers. Lastly, it is important to continue to

seriously punish willful nonparticipants and those without legal exemptions.

Other efforts recommended by the TAS for 2015 involve a deeper level of

education with not just soft flyers and marketing but educating recent immigrants as well

about FATCA reporting. The IRS is considering working in tandem with the US State

Department and Department of Homeland Security (which would be unimaginable in

1970) in exchanging financial data information because those two departments have

access to persons’ visa and residency statuses. 125

The IRS at every step of FATCA implementation since 2010 has actively needed

help in developing guidance working closely with its Chief Counsel (appointed by the

President) and its Large Business and International (LB&I) Division (which serves

corporations, partnerships over $10 million with tax law and accounting). The IRS has

received a multitude of written advice from FFIs, taxpayers, and tax experts regarding

FATCA impact. As recently as February 20, 2014, only 5 months before FATCA came

into effect, certain amendments and revisions to 2013 final regulations were added to

FATCA requirements. They include newly updated FATCA forms, corrected FFI

registration procedures, and allowing taxpayers to directly report to the IRS (rather than

withholding agents) by certain entities regarding their substantial U.S. owners. Finally,

the IRS has also listened to the concerns of FFIs, NFFEs, and other stakeholders in the

design of the registration process on its online portal which is the right step forward.

Conclusion

After concluding research regarding FATCA, my own views are that FATCA is

and will be continually building on itself. International alliances, nations, non-profit

organisations, think tanks, individual taxpayers, tax dodgers, accountants, lawyers, tax

agencies, FFIs, companies, lawmakers, and any counterparties all have differing and

rapidly evolving views regarding the law. When FATCA was attached to the Hiring

Incentives to Restore Employment Act back in early 2010, it was merely a bipartisan

effort to restore public trust in congress and congressional trust in the IRS. FATCA was

among many efforts in convincing the generally unaware American public that the newly

elected Obama government was doing everything to help restore the economic

progress only four years earlier in 2006.

FATCA has a long way to go in convincing the world and overseas taxpayers that

it truly isn’t just some intimidation technique of the US government but really a tool that

was meant to catch “bad” actors. FATCA ended up being much far-reaching and

sweeping than originally intended. Whatever FATCA’s original goals were, over the past

four years; revisions, updates, and addenda have only added to FATCA’s sphere of

influence culminating in the form of AEOI-influenced GATCA. GATCA is almost

certainly the future of international tax. Tax havenry has and will become further

diminished as the influence of major world tax havens such as Switzerland has been

usurped by America’s sheer doggedness to implement FATCA. America’s economic,

political, and potential military clout over tax havenry is a testament to lingering US

economic prowess and influence. Carrying out FATCA will not only close America’s

budget deficit gaps but also create a strong tax data exchange network around the

world that would disallow future instances of tax evasion from ever happening. FATCA

has become a global policing standard and warning for tax evaders to think twice as

mentioned earlier. The fact that the US who has aggressively pushed for international

cooperation regarding FATCA but has not signed the OECD pact has not helped quell

foreign complaints and concerns of US “arrogance” and US functioning on a double

standard. The United States Congress and its tax agencies need to build trust with the

world and not proceed to frustrate governments with non-reciprocity. By pushing for

FATCA but not signing for global data exchange because they fall out of US legal

scope, the United States is not ensuring cooperation. Language stating that the US will

“share information as part of bilateral deals” doesn’t exactly build trust as much as

signing the recent global AEOI pact. 126

While only about 10% of the 8 million US citizens abroad and many more US

persons have acted on their filing requirements, the US persons population abroad is

growing and the IRS would be best served to simplify reporting using its greatest tool,

IRS.gov. As reporting moves away from traditional methods such as paper and

telephone; digital and online services need greater attention. The IRS’s phased

improvements needs to include and expand its antiquated International Taxpayer

Service to beyond phone and walk-in services in only four foreign tax attaché offices

(embassies/consulates) to many more physical sites and offices. These changes are

required now going into 2015 to reflect the evolving web-based digital tax reporting era

that would best help FATCA in 2015 and beyond.

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Appendix

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