FATCA Developments (part 2)

In my last post I summarised a report prepared for the Petitions Committee of the European Parliament about the application of FATCA in Europe including the effect of the new General Data Protection Regulation (GDPR). In this follow up post I discuss the context of this report and other recent developments and the implications of these European actions on those of us who live outside the EU.

Accidental Americans

By now most Americans Abroad will be familiar with the wide-reaching effects of FATCA. These effects vary widely. Those in countries with banks that were badly hit by the DOJ Swiss Bank prosecutions, are finding it very difficult to open more than the most basic non-interest bearing bank account. Long term expats who were unaware of their US filing obligations or the more esoteric “foreign” provisions in the US tax code are finding that they have structured their financial life in ways that are toxic when US tax rules are applied. And with the recent tax reform, it has only gotten worse. Perhaps the worst situation is that faced by “Accidental Americans” whose connection to the US is tenuous at best.

In the past year, one of the more active fronts in the FATCA “wars” has been in France with the formation of L’Association des Américains Accidentels (AAA). This group has been generating media attention and actively lobbying the French government to come to their aid, culminating in the unanimous passage of a resolution by the French Senate inviting the government to take action to support French citizens caught up in the FATCA nightmare. This latest development hasn’t been picked up by the English-language media, but has been covered in French. (Anglophones, Google Translate is your friend!)

While all of this action has been building up in France, J.R., a French citizen and Accidental American, submitted his petition to the European Parliament, resulting in the report described in my last post, and a new oral question to the European Commission from the Petitions Committee.

Possible EU Action

The Petitions Committee will be voting at their June meeting on a resolution to be put to a Plenary session of European Parliament in July. The original draft of the resolution can be found here, with proposed amendments here. Many of the recommendations of Prof. Garbarino’s report have found their way into this resolution.  The first action paragraph added by the amendments to the resolution says it all:

-1. Calls on Member States and the Commission to ensure that the fundamental rights of all Citizens, in particular the Accidental Americans, are ensured, especially the right to a private and family life, the right to privacy and the principle of non-discrimination, as laid down in the Charter of fundamental rights of the European Union and in the European Convention of Human Rights

Additional paragraphs ask the Commission and Member States to

• ensure that legal residents are not discriminated against when it comes to financial services;
• ensure that EU data protection laws are followed and amend IGAs if necessary to ensure compliance with GDPR;
• prepare a full impact statement on the impact of FATCA and CBT on EU residents and citizens;
• noting the lack of reciprocity in the FATCA IGAs, calls on Member states to suspend the IGAs (or at least reporting on all but US citizens residing in the US) until reciprocity is achieved.

IF this resolution passes (the vote in the Petitions Committee is scheduled for 19 June, with a vote in the Plenary session in July), that doesn’t mean immediate action. Expect some foot-dragging by the Commission and Member States. However, due to the new GDPR, something will need to be done before the next data transmission in September.

Effect on FATCA worldwide

It is my hope that these developments will cause the IRS and Congress to consider the impact of FATCA on Americans abroad relative to the (minimal) potential revenue stream from tax residents of other countries who can offset most, if not all of their potential US tax liability with a credit for taxes paid to their home country. These are not the tax evaders FATCA was aimed at, but they are the main victims of a global stop and frisk program to locate, tax and penalise non-resident US citizens. Of course, expats have been hoping along these lines since 2010.

However, with GDPR there is at least some hope that EU member states (or the EU collectively) will be able to re-negotiate the FATCA IGAs. Any concession that EU member states are able to win from the IRS will be welcome, and can be used by other countries to win similar concessions. While Article 7 of the Model 1A IGA calls for consistency, its applicability in this instance will depend on exactly how the EU member states negotiate and draft any concessions. Article 7 says that IGA partners will receive the benefit of any more favourable terms with regard to potential penalties on local financial institutions and due diligence requirements, but not with regard to the actual reporting requirements. But, if EU Member States gain the concession that they no longer have to report on their own legal residents, I would expect other G-20 nations to ask for the same. Then there’s the matter of Article 10, which calls for the parties to revisit the agreement by the end of 2016 with regard to reciprocity. I have yet to find evidence that any partner jurisdiction has requested such a review.

Of course, any change in FATCA reporting requirements will not override US law. In the absence of an adoption of residence based taxation by the US, those with US assets or who plan on returning to the US will be exposed to US tax on non-resident citizens. However, CBT was unenforceable with respect to US citizens without any US assets prior to FATCA (and is still largely unenforceable) because the IRS has very limited power to collect from assets held outside the US. FATCA is really a data privacy/protection issue because under FATCA the IRS has a better idea of who might have a filing obligation (not who owes tax), and some non-US banks are assisting the IRS by insisting on proof of US tax compliance. Here’s hoping that the current push for greater data protection, as exemplified by GDPR, will have global effects when it comes to sending sensitive financial data on a country’s own citizens and residents across international borders.