FATCA – Are we deceived?

 “All warfare is based on deception” Sun Tzu

London, England. May 20, 2014. 1PM BST.

In the UK today two stories from the USA were reported as part of the same news bulletin.

GM it seems were fined $35 million for failing to recall vehicles on a timely basis to appropriately address safety issues.

Credit Suisse were fine $2.5 billion for helping American citizens evade US taxation.

It is likely that more than a few Brits rolled there eyes and thought “Only in America”.

America is topical in the UK at the moment because of Pfizer’s ostensible failure to purchase AstraZeneca.

The example of Pfizer can be used to illustrate some differences of culture on each side of ‘the pond’.

The Pfizer transaction has thus far been unsuccessful because of Pfizer’s failure to address the political climate in the UK right now.

This is best illustrated by the fact that both parties got very close to agreeing on a price at which ‘sensible negotiations’ could start.

When the Pfizers takeover of AZ was first mooted AZ’s shareprice was £35 (“£” is [Shift + 3] on a MacBook Air – obviously something of a minor currency). Pfizer offered £55 per share. AZ rejected the offer outright but said it would talk at £59 per share. When AZ rejected the offer AZs share price dropped 10%.

So why did the transaction fail?

It failed because Pfizer approached the transaction in a fashion reminiscent of an eighties style corporate raid, the premise of which is that ‘is all comes down to price’.

Of course, it does come down to price but the game to has to played with decorum, sometimes its not just what you say but how you say it.

Unfortunately both what was said and how it was said fell short of the mark.

One of the reasons cited by Pfizer for wanting to do such a deal with AZ was the lower tax regime in the UK.

Right there the US hit a raw nerve in the UK; we are somewhat nauseated by Americans using allied countries to avoid American taxes, European taxes and sometimes tax altogether.

Well known examples include Starbucks, Amazon and Google. None of this illegal.

When a UK parliamentary committee interviewed Pfizer on tax aspects of the proposed takeover of AZ, Pfizer said if the tax advantages were withdrawn then that would affect the price Pfizer was prepared to pay for AZ.

It seems to many outside the US that the US administration needs to tidy up its tax code. It is understood that the IRS will close this “tax loophole” inside 6 months. Though there are those who wonder if the IRS could ‘deliver a newspaper to next door’ inside 6 months.

It could be argued that the activities of Google, Amazon, Starbucks et al are simply a symptom of America’s failure to set up a commercially competitive tax regime.

Whilst Pfizer was very close to agreeing a price it was perhaps less successful in navigating the politics and right now taxation is close to the top of the British political agenda.

When news of the $2.5 billion (no problem finding $ on this keyboard) Credit Suisse fine broke out, reactions in the US included “ouch, that has got to hurt” and “what will the regulators do with that money?”

In the UK, BBC Radio Four reported the fine as being rather lenient because Credit Suisse kept its banking license.

That is quite a contrast.

Ironically (here I use the British meaning rather than the American) when it comes to Pfizer the Americans might have landed a formidable blow. Having rejected Pfizers bid AZ is now under pressure from its shareholders to evidence how they will provide future profits which justify turning down a £55 offer.

Time will tell but Pfizer might well have been successful this had they played politics more carefully (on both sides of ‘the pond’) and avoided tax altogether (no pun intended).

Of course we Brits had other interest to protect including R&D spend on pharmaceuticals, not to mention our concerns about Pfizer’s reputation in the UK and other parts of Europe.

Returning to Credit Suisse, what is not reported is that the American authorities have been working on this since 2008 when they fined UBS $780 million.

CS, HSBC and Deutsche Bank have all been reported to have been off boarding Americans due their being too complicated to deal with for tax reasons.

Does the phrase “red rag to a bull” spring to mind? With hindsight that might not have been the most prudent course of action when being investigated by the IRS for allegedly helping Americans evade taxes.

Other banks must be watching these developments very closely, particularly those already under investigation who at the same time were known to have been off boarding Americans and citing the US tax regime as the reason.

So what next?

Well we can say for sure that Americans and Europeans will continue to misunderstand each other. We can say for sure that each side will continue to see issues very differently. For example, the recent EU ruling against Google on the “Right to be forgotten” has polarised opinions. I have heard Americans call this ruling “technologically illiterate” and Europeans call this “a law that simply reflects the moral absolute of the right to be forgotten”.

We can also say for sure that more high profile names will be fined huge amounts by the regulators for facilitating tax evasion. This much is inevitable.

Some will consider these fines draconian, others lenient (because the institution is still in business).

At the same time (and some would say counter intuitively given this recent fine) the IRS recently announced (Notice 2014-33) that 2014 and 2015 are “transitional” years for FATCA so long as institutions can evidence “good faith”.

Some see this as a weakening of FATCA. They are deceived: the American regulators are suitably (some would say unsuitably) motivated and probably unsuitably well financed to go after those institutions they know are helping tax evaders.

But how would they know, right?

Wrong, because the Americans have run several OVDP (Offshore Voluntary Disclosure Programs) where some relief is given to reformed tax evaders who come clean and tell the IRS precisely whom, when and where has been assisting Americans evade taxes abroad.

So the message from America is clear “We know who you are and we are coming to get you”.

If your institution can evidence “good faith” in attempting to comply with FATCA then 2014 and 2015 will indeed be “transitional” for you.

But can you? If not then maybe when the regulators come knocking the word “transition” will carry an altogether different meaning.

Are you ready?

All warfare is based on deception. Hence, when we are able to attack, we must seem unable; when using our forces, we must appear inactive; when we are near, we must make the enemy believe we are far away; when far away, we must make him believe we are near.

Sun Tzu

 

 

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