Is FATCA failing? Here is my reply. (Haydon Perryman)

Is FATCA failing? A reply.

This is a question that can be asked given that only 104K of FFIs had registered on the IRS Portal by September 24, 2014.

When you compare 104K to the IRS estimate that between 400K and 600K need to register, 104K does indeed look small.

On the face of it that means there are a lot of Non Participating FFIs out there. A look at the regulations will tell us that withholding starts in 2014.

It is a fact that the regulations state that withholding starts in 2014. But let me ask a question: is that actually what happens in reality?

Withholding occurs on NP-FFI (Non Participating FFIs) and RAH (Recalcitrant Account Holders).

FATCA has been factored into on boarding. For those who doubt this, just try opening an account – you’ll soon find that there are questions in the onboarding process that address FATCA directly. So, in terms of new accounts there will be no NP-FFI or RAH, hence no withholding. What FFI wants to onboard a Non Participating FFI or Recalcitrant Account Holder in the current climate?

There will be a few violations on the lunatic fringe but to say there will be no withholding on new customers in 2014 is a safe generalization.

What of pre-existing customers? The same applies, withholding only occurs on RAHs and NP-FFIs. But how does a pre-existing RAHs or NP-FFI enter either category?

Here are two definitions straight from the IRS. Source: 1042-S instructions.

Nonparticipating FFI: A nonparticipating FFI is a foreign financial

institution that is not a participating FFI, deemed-compliant FFI, or exempt beneficial owner.

Recalcitrant Account Holder: Generally, a recalcitrant account holder is an account holder of a participating or deemed-compliant FFI that failed to provide the documentation required under chapter 4 to determine the account holder’s status or to report the account as a U.S. account.

Simply because an account holder has not provided a Self Declaration (SD) for Tax Purposes (e.g. a W8) by July 1, 2014 does not mean that they are a RAH or NPFFI.

To “achieve” the status of RAH or NPFFI is a process and that process takes a little time. Until the account holder “achieves” the FATCA status of RAH or NPFFI they can not be withheld upon.

Merely being an FFI in a Non IGA Country, and a FFI that has not registered on the IRS Portal by September 24, 2014 does not mean you are a NP-FFI.

That said if the above paragraph applies to you then you would need to act quickly.

In terms of FATCA CDD the most time proximate deadline is December 31, 2014. This is the deadline for completing the FATCA CDD on Prima Facie FFIs in Non IGAs countries.

So, if by December 31, 2014 a FFI in a Non IGA Country has not completed a SD (typically a W8) for the SD requestor then they will be categorized as a NP-FFI and will be held upon.

I’ve seen nothing about withholding being applied retrospectively but the sword of Damocles falls on December 31, 2014 on FFIs in Non IGAs countries.

FATCA isn’t failing because 104K have registered on the IRS FATCA Portal. It is true though that those FFIs in Non IGA Countries should be suitably motivated to expedite their registration.

Three counter arguments to even the point just made.

  1. Who is to say that by December 2014 that country will still not have entered into an IGA or at least agreed one in substance?
  2. Can most institutions complete the FATCA CDD on PF-FFI by December 31, 2014 and hence categorize the PF-FFI as a NP-FFI by then? Regulations notwithstanding, is this a realistic expectation given the outreach that is required on an unprecedented scale. Lets not forget that in these jurisdictions the vast majority have not heard of a W8.
  3. Some PF-FFIs will respond in early 2015 to requestors of W8s with “Applied for” in the field for GIIN. As a matter of practicality, given the safety in numbers, are we going to treat all such accounts as NP-FFIs?

In short the regulations say one thing but that does mean full compliance is obtainable.

To reiterate I’m not sure the registration numbers of FFIs indicates how successful FATCA is or is not.

To zoom out, what was FATCA meant to achieve? Tackling Americans evading tax via offshore accounts right?

Wrong. That is twaddle.

None of recent fines for tax evasion relies on FATCA. None. All the regulations required and used for this purpose were there before FATCA.

If America wanted to go after American tax evaders the powers they had under Chapter 3 and the fines they could have administered under Chapter 3 of the US Tax Code (and other pre-existing parts of the Tax Code) would dwarf any of the high profile fines we have recently observed.

To achieve this the IRS would have to have been well funded but to say this would have been self financing is something of an understatement (and I’m an Accountant).

What FATCA did was put the burden on the banks.

If that is a good thing then FATCA is a success.

Also, if tax evasion is to be tackled then that is a global problem. FATCA was the catalyst for the world wide exchange of Financial Information – AEoI.

While FATCA was nosily being vilified, AEoI was quietly and rapidly pushed through and has now been ratified by the G20 with automatic financial information exchange by September 2017.

How many have realized that the September 2017 exchange is on 2016 information and that means that AEoI begins in 2016?

Is FATCA a success? That depends on whether you think it is good or bad and on what you believe were the true motivations behind it.

It was not about collecting money for the US Treasury. It won’t achieve that and if that was the goal the IRS had all it needed (apart from the financing) before FATCA. The US had all it needed to bolster its coffers had it increased the funding of the IRS to go after offshore tax evasion under Chapter 3.)

If it was about getting information to the IRS on offshore American accounts then in the short term FATCA is a failure. For FATCA, The Treasury will get no information until next year. Even then, the data exchange is based on reciprocity from the US. This puts information exchange in jeopardy.

Perhaps FATCA’s greatest success has been that it spawned the AEoI. It will be the AEoI that generates the Automatic Exchange of Financial Information.

The US will have to reciprocate. US reciprocation was never part of HR 2847.

FinCEN Proposal (RIN 1506-AB25) issued July 30, 2014 introduces FATCA to US soil.

If accepted, United Stated Financial Institutions face many of the FATCA obligations FFIs (Foreign Financial Institutions) face under FATCA. (As page 1 of the Proposal states, this would affect banks, brokers dealers, mutual funds etc.)

FATCAs legacy is AEoI which comes at considerable cost not only to Non US Financial Institutions but also to US Financial Institutions.

Not only that, American citizens abroad have been treated as pariahs as a result of FATCA. FATCA has caused so much misery for innocent Americans that had the regulation come from any other country it would probably have been treated as an International Incident.

I wonder if the legislators who caused the genesis of HR 2847 could have foreseen what FATCA would morph into. It seems a lot like they put a grenade into their mouths and threw the pin offshore.