The widely discussed mandates of FATCA on foreign governments and banks to provide information about US account holders is about to take on a new dimension. One of the recent outcomes of FATCA has been the advent of intergovernmental agreements or IGAs to facilitate transfer of information from foreign banks to the IRS.
The Beginning of Information Exchange: Model 1 IGAs
The Model 1 IGA allows a foreign financial institution (FFI)to share the account data with its own government, who will then have the responsibility to give it to the US. Part of that deal is that the US will also share information with that country about any of its citizens banking in the US. Many countries have signed this type of IGA with the US, and have in effect initiated a global network for policing of bank and financial information that is without precedent.
Previously, agreements of this type were the domain of tax treaties between two countries that carried the weight of other traditional bi-lateral treaties, which often superseded domestic law. Those treaties were often designed to limit double taxation or resolve other conflicting provisions that might inhibit cross border trade.
The use of IGAs under FATCA mimic this type of treaty, but lack the legal weight of a formal treaty, and in some cases may violate a country’s domestic laws to permit disclosure of account information. To circumvent this, some countries require US citizens to sign a waiver of privacy rights to open an account in an FFI, rather than test the legality of disclosure under FATCA.
The OECD and Automatic Exchange of Information
This has not stopped the proponents of FATCA from pursuing these IGAs and most recently the Organization of Economic Co-operation and Development (OECD) has gotten on board. This year the OECD presented a model that called for automatic exchange of information among member countries that is based on the FATCA mandates for account information exchange. Dubbed a “Global FATCA”, this would be a separate law that would cover member states of OECD, the European Union and the G-20 nations.
Suddenly, it appears there is no longer a need for tax treaties to supersede domestic privacy or banking laws, since the IRS and now OECD have found administrative avenues to shortcut formal legal agreements between nations. Notions of privacy and financial account security have become the target in a global dragnet to capture tax evaders where ever they may be hiding. The process of actually negotiating legal treaties among countries would be too slow a process for the tax authorities of cash strapped nations.
Once this network is in place the intergovernmental cooperation will be widespread with only a few hold outs such as China. A few countries including Australia and Italy have declared plans for tax amnesties for those with undeclared assets, and will give them the chance to avoid penalties if they come forward. While this may seem generous compared to the no-amnesty rule by the IRS, the objective is the same. It appears that there is a groundswell of global support for laws that place the collection of unpaid taxes ahead of personal privacy and even traditional international law.
