updated 6:36 PM CET, Mar 18, 2023

FATCA expert McGill sees little likelihood of U.S. relaxing FATCA in 2021

It was probably wishful thinking on the part of American expats and "accidental Americans" across Europe that France's National Assembly two weeks ago actually would have approved a proposal that would have seen France stand up to the U.S. government over its anti-tax evasion law known as FATCA...

After all, as most FATCA-watchers are the first to acknowledge, the governments of other countries are well-known for being wary of picking battles with Uncle Sam unless they absolutely have to.

And even though it might not seem such a big deal for a country like France to insist that the U.S. immediately begin providing the same information to France about its citizens' U.S. bank accounts that France – in compliance with FATCA – forwards to the U.S. about French bank accounts held by American citizens, no country has yet done so, in the ten years since the law has been in force.

Ross McGill croppedAfter all, as most FATCA-watchers are the first to acknowledge, the governments of other countries are well-known for being wary of picking battles with Uncle Sam unless they absolutely have to.

And even though it might not seem such a big deal for a country like France to insist that the U.S. immediately begin providing the same information to France about its citizens' U.S. bank accounts that France – in compliance with FATCA – forwards to the U.S. about French bank accounts held by American citizens, no country has yet done so, in the ten years since the law has been in force.

To be sure, FATCA is not one of your straightforward, one-size-fits-all laws.

In actual fact, says UK-based FATCA expert Ross McGill, the Foreign Account Tax Compliance Act of 2010 is enforced in most jurisdictions by intergovernmental agreements (IGAs) that are signed between the U.S. and each FATCA-signatory country – and, something few FATCA-watchers probably are aware of, there are a variety of IGA types, not just Model 1 and Model 2 IGAs.

According to McGill, the variations in language of these IGAs,  "e.g. M1A and M1B", reflects such external factors as whether or not other tax information-exchange agreements (TIEAs) are in place between the U.S. and the jurisdiction in question, and/or whether a double tax treaty (DTT) between the two countries exists, or not.

These factors, as well as the leverage that a particular jurisdiction has over the IGA negotiations – for example, how attractive it is for Americans to be resident there, and/or how likely they might be to be tempted into tax evasion there, as a result of the jurisdiction's domestic tax rates or standards of tax oversight – determines whether reciprocity is included in the final deal, McGill, pictured left, says.

Most importantly, though, he warns that anyone who is thinking that a change of leadership in the White House on Jan. 20 might mean long-sought changes to the problematic FATCA regulations, including a significant increase in reciprocity on the part of the U.S., might at last be forthcoming is almost certain to be disappointed.

"I think there is some room for movement in 2021, but not if it's based on a country-by-country pushback, unless it were possibly from a jurisdiction that's a tax evasion hot-spot for the U.S. – which France is not," McGill said.

McGill was speaking to the American Expat Financial News Journal in the wake of the French Assembly's decision on Nov. 13 not to include an amendment calling on the U.S. to begin a reciprocal exchange of data on U.S. accounts held by French citizens – which had been proposed by two assemblymen, Laurent Saint-Martin and Marc Le Fur – in the 2021 finance bill (Projet de loi de finances pour 2021).

"Once [U.S. president-elect] Joe Biden is in office in January, given his pledges that he would tax wealthy individuals and corporations more [than the current Trump administration has done], he may be expected to enforce the intergovernmental agreements [that govern how other countries collect and send to the U.S. the non-U.S. account details of all of their American-citizen account-holders] more aggressively," McGill added.

This, though, could also "give those jurisdictions that have existing FATCA IGAs with the U.S. some leverage with respect to demanding full reciprocity, in return for any additional enforcement measures."

Law aimed at U.S. tax evaders
using non-U.S. banks

FATCA was signed into law by President Obama in 2010, buried inside a domestic jobs bill known as the HIRE (Hiring Incentives to Restore [U.S.] Employment) Act, which had been conceived and introduced in order to give U.S. corporations tax breaks over a short period of time, in order to encourage them to hire more workers. FATCA was explained as the element of the legislation that would provide the funding.

It had its origins in various anti-tax evasion bills that had been proposed in response to published reports of large-scale tax avoidance by wealthy individuals in the U.S. and elsewhere, who had been making use of overseas financial institutions, such as Swiss banks, to stash their cash.

A few years after it came into force, most of the rest of the world's countries adopted a similar "automatic exchange of information" (AEoI) regulation drawn up by the Organisation for Co-operation and Development which requires these countries' governments to share information with each other either bilaterally or on a ‘wider adoption’ basis.

The information-sharing at governmental level requires each government to force its domestic financial institutions to share their reportable account holder information with them.

The enabling part of the OECD's global version of FATCA, which defines how this domestic reporting happens, is known as the Common Reporting Standard (CRS).

The U.S. has not signed up to the CRS, arguing that it didn't need to because it had FATCA, although most of its IGAs now mention something about "co-operating towards a common goal".

FATCA and its associated 30% penalties are often used as an excuse by financial firms to explain why they don’t want Americans (even "accidental Americans – those who often feel most aggrieved by FATCA, who typically were born in the U.S. to foreign parents who didn't stay, or else who were born abroad to American parents) opening accounts, or keeping existing accounts.

McGill says that this is an area "mostly misunderstood that has never been corrected.

"First, the FATCA penalty is applied to a financial entity's customers, not to the financial entity itself. Financial companies are more concerned with the reputational damage of being associated with a perceived breach of an anti-tax evasion regulation."

However, he adds, "there are significant direct and indirect risks for financial institutions that are found guilty of ‘substantial non-compliance’ by one or other of the two Competent Authorities on each side of the IGA.

"Reputational risk can quickly result in operational risk if, for example, a foreign financial institution (FFI) in substantial non-compliance is penalised domestically, and also has its GIIN ("Global Intermediary Identification Number", used for identification purposes in FATCA reporting) revoked by the IRS. This has led, in a small number of cases, to other financial institutions closing down correspondent banking relationships, and excluding the FFI from the U.S. securities markets.

"At that point, the domestic financial penalty imposed on the FFI's customers becomes rather moot, as the firm’s brand will likely be front page news.

The US has, in the past few years, conducted a couple of high profile, after-the-fact, covert sting operations, in which it has filed suits against individuals that it was able to convince to open accounts for ‘Americans’, who would then be asked to hide them or not report them, as needed.

"But these have tended to target already-suspect institutions or individuals, and focus on criminality, rather than testing the compliance of a ‘normal’ institution." 

McGill adds that there are two halves to the FATCA reporting story: "One half of FATCA obligates Americans with accounts overseas to disclose them. The other half deals with FFIs reporting those accounts. The two are a pincer movement, that in the end, in principle, should marry up." 

FATCA system 'built on sand'

Even as American expats struggle with FATCA, meanwhile, McGill points out that the FATCA regime is actually not well-constructed, and in fact, is "technically built on sand".

Some countries aren't thought to enforce it as strictly as others – and are even determinedly disinclined to, he notes, "until the U.S. steps up to its reciprocal obligations".

This is thought to be why accidental Americans in some countries, such as France and the Netherlands, are struggling to keep from having their bank accounts closed unless they produce TINs, while FATCA seems not to be an issue in some other countries.

Meanwhile, McGill points out, one of the difficulties the U.S. potentially faces if and when the countries with which it has signed FATCA IGAs ever do begin to insist that it reciprocates "is that large U.S. financial institutions have already said that they have no interest in doing the kind of work that FFIs have to do under the IGAs. So expect some strong lobbying efforts [by these FFIs].

"All in all, lots of moving parts, and it's not clear what if anything will drive any substantial change.

"It's unlikely that the U.S. will do the obvious and simplify FATCA by repealing it and signing up to the CRS, in order to create the global anti-tax-evasion network needed to really address the problem effectively."

As for a couple of recent European Court of Justice rulings that some FATCA opponents have said could mean that FATCA’s days could be numbered on grounds that it violates EU data privacy regulations, McGill says that at least from a regulatory and compliance standpoint, he's not sure this is necessarily the case, though he adds, "I'm not a lawyer". 

"But firstly, the information sharing is between governments under agreed information sharing treaties in which, in the case of the U.S., the IRS is asking for information relating to its own citizens (or presumed citizens).

"Any GDPR issues would first of all focus on determining whether these individuals actually had dual citizenship -- and then the argument would focus on the EU citizenship from a GDPR perspective, rather than the U.S. citizenship. 

"Next, the IGAs have already been translated into domestic law in each country, in order to create and enforce the data flow from the FFIs to each country's domestic tax authority.

"Third, GDPR does not actually prevent this data from being sent to the U.S., it only prevents it going to the U.S. if the account holder has not given their explicit permission.

"Most FFIs have already included specific text in their onboarding procedures and documentation that gets them around this issue, by asserting that the operation of an account essentially gives that explicit consent for operational or regulatory purposes. 

"Finally, information sharing, under a different guise, has been going on for years.

"When a financial institution that has not signed a so-called 'qualified intermediary' (QI) agreement with the IRS then receives U.S.-sourced income, and pays it to a non-U.S. account holder, the information associated with that account holder – name, address, tax ID, date of birth, place of birth, amount of income received, tax withheld – all of that is sent to the IRS on forms 1042-S.

"And that’s not information about Americans, it's information about people who are not Americans!

Ironically, it's this 1042-S information that’s being fed back to FATCA partner jurisdictions, in an attempt to meet reciprocity obligations and, incidentally, it means that U.S. financial institutions have nothing to do.

"There are, in short, so many holes in that process you could drive two trucks through it side-by-side.

"The essence of reciprocity would have to mean that U.S. institutions would need to conduct similar levels of due diligence on account holders, and report non-U,S, account holders to the IRS, who would then have to aggregate that data by partner jurisdiction and submit it to them.

"The information on the 1042-S returns is neither complete nor accurate for that purpose.

"For example, a German with a US bank account receiving income from French sources would not appear on a reciprocal 1042-S based report to the German authorities under the IGA because its only reporting US sourced income while FATCA requires global income to be considered.

"It's not clear whether a President Biden, given the scale of the financial impacts of COVID-19 in the U.S., will think that the efforts of tightening up tax evasion regulations on Americans abroad will be a high priority, or contribute any significant sum to the Treasury.  There is, after all, little evidence of substantial repatriation of tax under FATCA so far.

"However, wealthy Americans, forewarned that tax hikes are coming, may well be considering their strategies for addressing these, if they're not already in the process of starting to implement them.

"So if the U.S. does come out in 2021 with some changes to FATCA, in an effort to stem what may be seen to be the beginning of what some are already saying is a likely exodus of private capital abroad, the US's FATCA IGA partners will be well positioned at this point to insist on a more balanced playing field when it comes to information sharing. And that, in turn, will create some concerns and costs for U.S. financial institutions that have so far, been quite well protected from the costs that non-U.S. institutions have had to bear."

Ross McGill is chairman of UK-based TConsult, and in addition to being an expert on FATCA, he is also a regular writer and commentator on such other regulations as the Common Reporting Standard, Sarbanes Oxley and Europe's General Data Protection Regulation. To read his thoughts on FATCA at 10, published on March 18, 2020, click here.