Since it was rolled out in 2010, FATCA (Foreign Tax Compliance Act) has been a topic of controversy among financial institutions, US citizens abroad and foreign countries. All of these parties are in some way affected by FATCA, its reporting requirements and the consequences imposed by the US government for non-compliance. Although it was designed to identify potential US taxpayers who may be hiding assets abroad, its broad reach has gone far beyond that original purpose, and it is evolving into a global information network for financial data of all types.
The Burden Of FATCA on FFIs
At first, many foreign financial institutions (FFI) had no intention of complying with what seemed like overreaching by the IRS to hunt down supposed tax cheats. But gradually it became clear that the US government intended to put enforcement mechanisms behind FATCA that would be difficult to ignore. FFIs in turn complained to their governments and looked for some support to ease the administrative burden of providing exhaustive account information directly to the IRS.
One by one, foreign jurisdictions began to negotiate intergovernmental agreements (IGA) with the US on how FATCA would be handled. There were two types of IGAs that emerged, Model 1 and Model 2. The Model 2 agreement reflects the original FATCA method, requiring FFIs to register with the IRS and sign an agreement to report on US account holders directly to the US. This is the type many FFIs objected to, and has led to the Model 1 IGA being formed.
Model 1 IGAs and Development of a Global Tax Network
Model 1 is an IGA that allows FFIs to report the FATCA related information to their own government, who would in turn share it with the US. An FFI that operates through its own government does not need to sign an FFI agreement with the IRS, although they must register. It is a little hard to believe, but it is beginning to appear that the US government actually has the power to make every bank in the world register with this IRS program, or face financial isolation.
A distinctive element of the Model 1 IGA is that it is reciprocal. In other words, the US also agrees to share information with the foreign government about account holdings in the US of that country’s citizens. In effect, FATCA has created a global information network based on intergovernmental cooperation to identify potential tax evaders of any nationality.
Similar to international information sharing programs about criminals and terrorists, the Model 1 IGAs form the basis for identifying any account holder in the world, and sending that data back to their home country. This would include those working abroad, investors, multi-national corporations or anyone who lives a ‘cross-border’ lifestyle or invests in other cultures. Just as with airport security, thousands are scrutinized and inconvenienced to locate a suspicious few. US citizens abroad already report being ‘locked out’ of many FFIs as a reaction to FATCA’s reporting mandates, and those same conditions could start to plague anyone trying to open a bank account outside of their home country.
