Looming confrontation seen between U.S. and its FATCA signatories, as 'FATCA II' takes shape in Washington
As the dust begins to settle on the latest revelation of the gap between what America's wealthiest are paying in federal income taxes, and ordinary, law-abiding American taxpayers are – which came earlier this week, in the form of a major report by the non-profit, New York-based ProPublica investigative journalism organization – expat Americans, tax experts and others are seeing a growing confrontation developing.
And rather than dreading it, some expats actually worry that the confrontation might not take place.
They worry that the countries in which they currently live, and which many are also citizens of, will lose their nerve and fail to stand up to the U.S. when they need it to. For example, when the U.S., as expected, seeks to increase its oversight of the financial activities of American citizens living abroad, by further adding to what most non-U.S. financial institutions already consider to be disproportionally-excessive reporting requirements mandated by the U.S. anti-tax evasion law known as FATCA.
As this and other publications have been reporting for more than a year, the growing number and scale of pushbacks to FATCA, and the way the U.S. taxes its expats generally, have been developing on a number of fronts.
One, which has yet to come close to being resolved, concerns that the way European entities are obliged to comply with FATCA violates Europe's data protection regulations.
Two European Court of Justice decisions last year, for example, were described by some observers at the time as potential game-changers with respect to FATCA (as the 2010 Foreign Account Tax Compliance Act is known); the first of these decisions, in July, invalidated the so-called Privacy Shield, which was described at the time as the main mechanism used by the EU to protect the personal data of EU citizens when it's transferred to the U.S.
In April, the European Data Protection Board told all the EU member states that they needed to carry out a "review" of their international agreements "that involve international transfers of personal data, such as those relating to taxation (e.g. to the automatic exchange of personal data for tax purposes)," citing concerns that such agreements could be violating the EU's General Data Protection Regulations. FATCA is acknowledged as being one such international agreement.
Last month, European Commission vice president Věra Jourová was quoted by Politico.eu, a political news website, as having told a gathering in Brussels that the U.S. needed to pass new legislation to, in Politico's words, "limit how its national security agencies access Europeans' data, if Washington and Brussels are to hammer out a new deal on transferring people's digital information across the Atlantic."
So-called "accidental Americans" in countries like France, the Netherlands and Germany, meanwhile, have been having some success in convincing elected officials in these countries of the need to find a way for dual nationals like them – who have never actually lived in the U.S. for more than a brief period as babies or small children, if at all, and never benefited from the American citizenship they acquired as a result of having been born there, or born elsewhere to an American parent – to be able to give up their U.S. citizenship easily, and otherwise be spared of the burden of having to be treated like American expats who actually come from the States.
In November 2019, a hearing on "FATCA and its extraterritorial impact on EU citizens" was held by the European Parliament's Petitions Committee (PETI) (see photo, above), in response to a petition filed with the European Parliament in 2016 by an "accidental" known officially only as "Mr. J.R. (French)."
One of the most significant anti-FATCA-as-it-currently-is-enforced moments occurred in July, 2018, when the European Parliament unanimously (470 votes to 43, with 26 abstentions) approved a resolution supporting the cause of Europe's "accidental Americans,” and their campaign to be allowed to cast off their American citizenship (and thus their taxation by the U.S.) more easily and cheaply than is currently possible for them to do.
The resolution had called on the EU member states as well as the European Commission to formally reopen the FATCA negotiations with the U.S.
Other hearings involving accidental Americans concerns have been held since then, including one, last year (pictured left), in which members of the Dutch House of Representatives met with representatives from two "accidental Americans" groups to discuss the way banks were warning such accidentals that their bank accounts were in danger of being closed unless they provided the banks with U.S. Taxpayer Identification Numbers or Social Security numbers, which few of them, having lived most of their lives in the Netherlands, had, and are not in most cases in a hurry to get.
Earlier this year (February), six well-known French Parliamentarians jointly signed a letter, on French Senate stationery, calling on French President Emmanuel Macron to take action with respect to the "tax and banking difficulties" the country's estimated 40,000 accidental Americans were "still" struggling with as a result of FATCA, as a result of the 2010 American law known as FATCA.
The six lawmakers were senators Jacky Deromedi (who represents French citizens living outside of France), Christophe André Frassa, and Antoine Lefèvre; and National Assembly members Laurent Saint-Martin, Guy Teissier and (Senegal-born) Marc Le Fur.
Saint-Martin and Le Fur had been the co-authors of a 2019 report that had found, among other things, that France should consider unilaterally giving up FATCA reporting.
Most recently, French lawmakers were expected to vote today on whether a proposal to require the U.S. to reciprocate with respect to the information it currently receives from France under FATCA should be put to a full vote by the Senate. As reported, an earlier attempt to introduce reciprocity to the FATCA regime last year was unsuccessful.
Non-U.S. banks to be compelled
to report account inflows, outflows
Although the Biden administration's plans for increasing the taxes paid by America's wealthiest individuals and companies aren't yet set in stone, the 114-page so-called Green Book, published on May 28, is seen by many as a pretty comprehensive rough idea of where things may be going, if Biden and the Democrats have their way.
The book, officially titled "General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals", and available by clicking here, was released a month after Biden's Americn Families Plan was unveiled, and provides further detail as to how it would seek to raise revenue.
Still, as some experts have noted, there could be a pushback against the Biden plans, not just from overseas' governments and banking industry lobbyists, but Republican members of Congress and business advocates as well.
The biggest worry for those keen to see the U.S. agree to making changes in the way it applies FATCA to ordinary American expats, including dual U.S. citizens who are also citizens of the countries in which they now live as well as "accidentals," is that the foreign governments they are counting on to stand up for their rights don't – for fear of displeasing what they regard as an ally and trading partner that's too big and powerful to mess with.
Those who voice this concern note that the pushback in countries like the Netherlands, France and the UK has tended to come mostly from individual lawmakers rather than the country in question's government itself.
For this reason, the say, any progress would therefore need some political coordination at the European level.
TConsult's McGill: skeptical of much change
Ross McGill, chairman of UK-based TConsult, a financial services consultancy, is a long-time observer of the global cross-border tax landscape – and as a result, a respected expert on such regulations as FATCA, the Common Reporting Standard, Sarbanes Oxley and Europe's General Data Protection Regulation.
Asked for his thoughts on a possible looming confrontation between the U.S. and the countries it may soon need to approach to discuss additional regulations with, he began by saying that, to start with, "I don’t think you’re going to see much change in the near term."
He continued: "Biden’s push to increase taxation, for entirely understandable political and fiscal reasons, will strengthen FATCA and, incidentally, strengthen automatic exchange of information regulations and the Common Reporting Standard – neither of which apply to U.S. expatriates – too."
McGill says he also doesn't foresee efforts to get the EU to "push back" against FATCA, on the reciprocity issue, succeeding, nor over concerns about its possible violations of the GDPR.
"With respect to the GDPR issue, first of all, the transfer of data is being conducted between governments, which can use higher-level arguments, treaties and agreements.
"Second, these individuals may consider themselves to be EU citizens, but they are actually dual citizens for the purpose of the transfer, and the transfer is being requested by their other jurisdiction – hence, no problem.
"The most likely outcome could be that the U.S. will extend some relief to ‘accidental Americans’ and expats, if they can meet certain criteria.
"The bigger problem, meanwhile, is that the financial services industry has now made Americans – accidental as well as expat – ‘bad news’ for so long that it has become endemic in the industry.
"Asking someone whether they're American has become one of the financial services industry's first 'onboarding' questions, when they sit down with a potential new client, irrespective of what kind of financial product they're interested in buying.
"It will take a lot more than a few reliefs for the Americans themselves before the global financial services industry sees them as anything more than an unacceptably-high- risk/high cost proposition.
"Biden would have to not only give some relief to the Americans overseas themselves, but also change some aspects of FATCA, as well as remove some of the other ‘baggage’ I've mentioned. And I just don’t see that the Biden administration would find the argument or the numbers compelling enough.
"However, if Biden did that, ironically it would probably bring FATCA closer to the CRS, and the argument for the U.S. to ditch FATCA and adopt CRS would strengthen.
"The industry needs to get its head round this issue.
"Certainly we’re not seeing the same offboarding effect with the CRS jurisdictions that we are with the U.S., and that’s typically because the CRS reporting obligations generally carry no other ‘baggage’ with it.
"The US system includes not just FATCA reporting of US persons but, for the financial institution, the possibility of 1099 reporting, 1099-B and C Penalty Notices if the SSN’s don’t match, backup withholding and SEC licensing.
"So, the idea of taking on a U.S. account holder has many more consequences for the non-U.S. financial institution than, say, a French person opening an account in Germany."
Need for EU to step forward seen
Paul Atkinson, a member of the board of the Paris-based Association of Americans Resident Overseas, is among those who say that in order to bring about FATCA reciprocity, and/or any other changes to the existing FATCA regime in Europe, the European Union – rather than the individual member states – must ultimately take the lead.
And while discussions might not be in the cards at the moment, he believes that some of the “revenue proposals” set out in the above-mentioned Green Book may force them in the future.
The Green Book section Atkinson is referring to (on page 88) describes a new financial account information reporting “regime” that would see financial institutions having to report “data on financial accounts, in an information return,” that would “report gross inflows and outflows with a breakdown for physical cash, transactions with a foreign account, and transfers to and from another account with the same owner.”
This requirement, the document continues, “would apply to all business and personal accounts from financial institutions, including bank, loan and investment accounts, with the exception of accounts below a low de minimis gross flow threshold of US$600, or fair market value of US$600.”
Especially given this extremely low threshold, these requirements will, Atkinson believes, put a heavy reporting burden on banks.
“At least FATCA was US$50,000, although banks often report accounts with far lower thresholds, perhaps in order to be on the safe side, perhaps because it is simpler," he notes.
“In the first instance these changes are only targeted at US financial institutions. But they are considerably more demanding than the requirements FATCA now places on foreign financial institutions, and if implemented as written here, pressure would likely emerge quickly to increase the burden of FATCA reporting on FFIs.
"This sounds like it could set off another wave of overseas banks getting rid of American account-holders, and the difficulties American expats are currently facing could easily take a quantum leap up the scale – assuming these proposals were to be formally approved by Congress, of course.
“What’s clear, based on what we know from our experience with FATCA – which took four years from being signed into law and coming into force – is that if what gets signed into law is anything like what they’re talking about, the Biden administration’s plans to 'close the Tax Gap’ may require serious talks with foreign governments, the way the FATCA IGAs did.
"And if that happened, I'd be very surprised if the FATCA IGAs weren’t brought out and placed on the table, to be included in the new ‘information reporting regime’.”
Data and numbers 'coins of the realm'
Charles Bruce, an American lawyer based in Washington, DC and London who serves as legal counsel for the Washington-based American Citizens Abroad, similiarly believes that the necessary reopening of discussions with U.S. officials in order to address the details of implementng such additional compliance legislation could present opportunities for the accidental Americans and other expat Americans "to get some relief" at last.
Bruce – who at the beginning of his career worked for the U.S. Senate Finance Committee, among other key organizations in the international tax and law sectors – stressed that his opinions were his own. But in his personal opinion, when the U.S. seeks to introduce new regulations aimed at fixing some of the major problems with the U.S. personal tax regime, "a spotlight will be thrown" on the accidental American situation in particular, and that "true long-term resident-abroad Americans could be taken out of the [citizenship-based tax] system, with no revenue loss and without creating new loopholes."
"Accidental Americans who truly reside abroad should be delighted," he went on.
"But the data and numbers will be key, for them and for everyone else. And at the moment, as has been pointed out many times, the data on Americans living outside of the U.S. is extremely poor – which is why ACA is adamant about the need to get the numbers now, and is revisiting the numbers issue with the District Economics Group.
"Data and numbers are the 'coins of the realm' in Washington."
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