With the release of a report to the European Parliament and unanimous passage of a resolution in the French Senate, it appears that some governments are finally starting to stand up to US bullying of their own citizens through FATCA and CBT.
This post will summarise the academic report, written by Professor Garbarino of Bocconi University. A follow up post will discuss the context of the report and other recent developments and the implications for those of us who live outside of the EU.
Report to Committee on Petitions, European Parliament
This 46 page report prepared for the European Parliament’s Committee on Petitions by Professor Carlo Garbarino (Bocconi University, Milan, Italy) clearly sets out the problems caused by the application of FATCA on the tax residents of EU member states, while supporting the aim of appropriately reducing cross-border tax evasion. There’s something here for everyone (except maybe a recalcitrant US Congress that insists on taxing citizens who have long since emigrated)! This was prepared in response to a petition by J.R., a French citizen and Accidental American (the petition is still available).
The report starts with a description of the history of FATCA which is generally accurate, though the estimated annual US tax loss from unreported overseas income perpetuates the excessive numbers used to justify passage of FATCA in the US Congress, which have been challenged by Prof William Byrnes (see section 1.02 of Background and Current Status of FATCA and CRS, Sept 2017). Initially, the EU and OECD approved of the aims of FATCA generally, but were hoping for a multilateral approach (or at least a series of reciprocal bilateral agreements). While the FATCA IGAs promised reciprocity, this has been largely illusory as the US does not have the legal mechanisms in place to deliver information on beneficial owners of opaque structures. Overall, the report is supportive of the underlying aims of Automatic Exchange of Information (AEOI) between jurisdictions, but it criticises the extraterritorial and non-reciprocal nature of FATCA.
So correctly the FATCA system has been referred to as “the most extensive extraterritorial reach of U.S. tax enforcement in history.” (citing this article)
So in the absence of reciprocity, the U.S. positions itself to gain from the very behaviour (the resistance to share information with other countries) it seeks to eliminate in other jurisdictions. (p23)
Negative Externalities (Problems) arising from FATCA
The report clearly articulates the negative impact of FATCA on all US citizens residing outside the US, noting that there is little justification for imposing FATCA requirements on the accounts of individuals not resident in the US.
So, whilst FATCA was purportedly targeted at U.S. resident taxpayers to prevent offshore tax evasion, in practice it includes a large cross-section of law-abiding individuals – American expatriates, dual European/American citizens, and Accidental Americans – who clearly are not perpetrating tax evasions but who are subject to unreasonable requests. (p27)
The report identifies two aspect of the problems facing these US citizens: denial of banking services and unjustified onerous compliance.
Does FATCA violate EU law?
The GDPR establishes a separate right to data protection, distinct from the right to privacy. Under Article 6 (1) of the GDPR, which establishes the legal reasons under which processing is allowed, transmission of FATCA data would require that transmission be in the public interest or necessary for the legitimate interests of the EU government transmitting the data to the US. Since FATCA is essentially non-reciprocal, it furthers the interests of the US government, not the interests of the transmitting tax agency or EU member state. The report implies that, without reciprocity, transmission of FATCA data to the IRS might violate the GDPR as transfer to a third country requires either authorization by the European Commission or “appropriate safeguards”, neither of which are yet in place. Where these are not available, then the transfer must be in the public interest – but, without reciprocity there is no European public interest in transferring data to the US (which reaps all the benefits). Further, with regard to EU residents, the report argues that application of FATCA reporting is not necessary and proportionate as most non-resident US citizens owe little, if any, US tax.
GDPR also protects the right of the person whose data is being processed to access their personal data and correct it if necessary. These protections are bypassed because FATCA does not require FFIs to notify account holders that their data is being collected and included in the FATCA data transmitted to the US, nor does FATCA contain any provision that would allow an accountholder to rectify erroneous data.
So, FATCA IGAs will need to be modified to conform with GDPR prior to the next scheduled data transfer in September 2018.
As for the European Convention on Human Rights, Article 14 prohibits discrimination on the basis of a number of factors, including national origin and Article 8 provides for the right to respect for privacy and family life. The report concludes that European financial institutions are routinely denying banking services due to customers’ perceived US status. The report goes beyond the basic account guaranteed by the Payment Account Directive, concluding:
In the case at hand the controlled group is precluded from financial services (such as private pension schemes, mortgages, life insurance, access to financial products) necessary in order to work, live and plan for the future. The controlled group (the Accidental Americans) is treated unfavourably by comparison to the benchmark comparison group. (p36)
The report further concludes that “FATCA’s aim to prevent tax evasion of U.S. Persons does not justify the widespread interference with the privacy rights of European citizens and European residents.” (p36)
The report concludes with a series of recommendations including both bilateral and unilateral actions.
Bilateral: Renegotiate IGAs
Clearly, with the entry into force of the GDPR, the FATCA IGAs will need to be adjusted to comply with this new European law. The report provides a laundry list of GDPR provisions that must be considered. The key required amendment is reciprocity of data exchange, as without reciprocity, the IGA does not further the public interest of the EU or its member states. Furthermore, blanket inclusion of US expatriates legally resident in the EU should be abandoned and replaced by the requirement that the US provide case-by-case justification in the form of “specific evidence that U.S. expatriates are using the EU financial system to engage in offshore tax evasion.” (p38-9)
Unilateral EU measures
Should the US be unwilling to renegotiate, the EU could consider blocking the transfer of some or all of the FATCA data. In particular, data of EU residents could be blocked from transmission. Significantly, the report suggests that judicial action could also be used to enforce GDPR, and Articles 8 and 14 of ECHR based on legal claims by Accidental Americans.
Unilateral US actions
Clearly, the EU cannot change US law. But, if the US were to join the rest of the world in taxing based on residence rather than both residence and citizenship, that would go a long way to ameliorating the issues raised by FATCA. Failing this, the US could raise the threshold for FFIs to report the accounts of non-resident US citizens (similar to the way that the IRS has exercised regulatory authority to increase the threshold for individual reporting on form 8938 for nonresident US citizens). The report urges diplomatic pressure on the US in support of these changes.
Finally, the report suggests that, since the US refuses to join the Common Reporting Standard, the US and EU member states should consider a multilateral agreement to align the reporting requirements of FATCA and CRS.
This report was formally presented to the Petitions Committee on 16 May 2018. You can watch Professor Garbarino’s presentation here; and you can hear the response of the Committee and representatives from the European Commission here. Both videos are in English.
In my next post I’ll discuss the context of this report including recent action by the French Senate, and implications for those of us living outside the European Union.