From FATCA to GATCA: The Making of Global Tax Network (Part 1)


"If you’ve never heard of FATCA, I don’t blame you. Few people have, and even fewer fully grasp what it really means… Now that FATCA has become a fait accompli, the foundation has been laid for GATCA. In the end, this means a permanent record of every penny you have ever earned, saved, borrowed, or spent anywhere in the world will be available in an instant to be analyzed and scrutinized." – Casey Research, International Man

You must have heard about the recent Panama Paper leaks which by far is the largest leak of its kind, releasing more than 11 million documents containing transactions for the last 40 years. The Panama based company, Mossack Fonseca, helped the global elite in establishing more than 214,000 shell companies (See Figure 1) to evade tax and lauder money. However, this massive leak exposed only a small part of the tax evasion industry (which is estimated between $21-$32 trillion) as obviously this firm is just one of many firms in dozens of international tax havens providing their services to the global select few.

Figure 1: Offshore shell companies created by Mossack Fonseca (source: http://bit.ly/26S0fj7)

So the bigger question going forward is, “How are we going to check tax evasion – through a well orchestrated process or through leaks?” How an international process can deter these transgressions, or better still, how can they catch the rogues? And how the FIs are going to catch up with all the action going on? And what does this mean for the IT and business, which is already crushing under the regulatory pressures? What’s the Roadmap any bank should follow to be on the top of this? All these questions and the complete landscape will be addressed in this and the upcoming post! Keep tuned in.

By the way, like every cloud has a silver lining, these leaks brought GATCA into public consciousness so much so that in few days after the release of the Panama papers, Panama finally agreed to comply with the standard!

Well, before we proceed, it would be contextual to give a brief of FATCA and how and why GATCA came into picture (don’t confuse with Gotcha – though intention is similar!).

FATCA, a foot-in-the-door?

It is estimated that the U.S. Treasury loses as much as 100 billion USD annually to offshore tax non-compliance. FATCA is a US law to prevent tax evasion by US citizens (and residents) through use of offshore accounts. The FATCA provisions were signed into US law in March 2010. The law is designed to tackle the non-disclosure by US citizens of taxable income and assets held in foreign accounts.

FATCA had far-reaching impact on US-based companies as well as foreign companies with US assets or clients. Under the new provisions, a FFI may enter into an agreement with IRS requiring it to report information on the FFI’s US accounts. A FFI that enters into such an agreement becomes a Participating FFI. If a FFI does not enter into an agreement with the IRS, all relevant US-sourced payments (such as Dividends and Interest paid by US corporations) will be subject to a 30% withholding tax.

The same 30% withholding tax will also apply to gross sale proceeds from the sale of relevant US property or stock investments. All FFIs must comply with FATCA or be subject to withholding (effectively, cutting the institution off from any profitable US investment opportunities). Under FATCA, the United States is not required to give anything in return.

FFIs were all too willing to provide the information in order to avoid the 30% withholding tax, but unfortunately most could not do so without being in violation of their home country’s data protection and privacy laws.  It would be illegal to send client information to a third party or government.

Violating the home country’s privacy laws could mean the institution would be shut down in the very jurisdiction where the financial institution was located.  Thus, this unilateral approach to FATCA was not workable and the US had to come up with a more palatable plan.  The US had to convince the governments of other countries to get on board and help ease FATCA’s implementation.  The fruit of this plan took the form of the so-called IGA.

Intergovernmental Agreement (IGA)

The FATCA Agreements with other countries is based on two Model IGAs. These agreements form the legal canopy under which the participating FFIs can pass on the required information to the IRS, without violating their home country’s data protection and privacy laws.

The first agreement, known as the Model 1 IGA, would require FFIs to report all FATCA-related information to their own local governmental agencies, which would then pass on the same to the IRS. Such an FFI will be treated as “deemed-compliant” with FATCA, and will generally not be subject to the 30% withholding.

Most of the Model 1 IGAs are reciprocal (to an extent), requiring the U.S. to provide certain information about residents of the Model 1 country in exchange for the information that country provides to the U.S. An FFI covered by a Model 1 IGA will not need to sign an FFI agreement, but it will need to register on the IRS’s FATCA Registration Portal or file Form 8957.

The Model 2 IGA would require FFIs to report information directly to the IRS. Under such IGA, FFIs will need to register with the IRS. Under Model 2 IGA, FFIs will need to register with the IRS and will sign an agreement modified to reflect the IGA. To date, only 14 countries have signed Model 2 IGA with IRS and major countries being Japan, Hong Kong and Switzerland.

Figure 2: FATCA Implementation Timeline (source: http://bit.ly/26S0ef7)

How Big is FATCA?

To date, a total of 113 jurisdictions have signed FATCA, pretty much covering all major countries and jurisdictions of the world. Around 77,000 banks and other FFIs have already registered with the US and received a Global Intermediary Identification Number (GIIN) to comply with FATCA. Most of the agreements are based on the Model 1 IGA. FATCA requires almost all of the banks in the world to register with the IRS if they want to continue the privilege of earning, moving, or even touching U.S. source income. FATCA seeks to create an international banking and financial database. The purpose of the data base is to enable the respective FATCA-friendly countries to track compliance of their respective citizens.

Now comes the Big Brother – GATCA!

As the world becomes increasingly globalised it is becoming easier for all taxpayers to make, hold and manage investments through financial institutions outside of their country of residence. Vast amounts of money are kept offshore and go untaxed to the extent that taxpayers fail to comply with tax obligations in their home jurisdiction. Offshore tax evasion is a serious problem for jurisdictions all over the world. Tax administrators need to work together to ensure that taxpayers pay the right amount of tax to the right jurisdiction. An open international architecture where taxpayers operate cross-border but tax administrations remain confined to their national borders can only be sustained where tax administrations co-operate.

After all, Americans are not the only tax evaders! So, for example, if India wishes to have the same FATCA like treaty with Singapore where both the countries will report to each other all the Income and Capital gains of Indian and Singaporeans respectively, there needs to be a taxation treaty between these countries. Now permutation and combinations takes over and imagine all countries of the world signing treaties with all countries—that’s when in February 2014, OECD presented a common global standard for the automatic exchange of tax information between countries. The standard is officially called the Automatic Exchange of Information (AEOI), and informally referred to as GATCA (Global Account Tax Compliance Act).

So, you are right to guess that there’s coming up new era of Global Tax Reporting Network where it would become very difficult to evade tax in your country or outside! (At least theoretically as of now)

Get excited for what’s to come next! In the next and final blog of this series, we’ll see what is GATCA (CRS) and how is this set up to be the winner!

Gaurav Kesarwani is a Consultant with Oracle Financial Services Analytical Applications.  He can be reached at Gaurav.Kesarwani AT oracle.com.

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