Fatca statement adds to confusion

A statement released alongside draft Fatca regulations makes for further confusion, says expert

A proposal by five major European countries aimed at easing the burden on firms in complying with the Foreign Account Tax Compliance Act (Fatca) simply adds further complication to the draft regulations, an industry expert warns.

France, Germany, Italy, Spain and the UK are proposing that foreign financial institutions (FFIs) in the five jurisdictions report on US account holders to their respective national government, which will then report the information to the US Internal Revenue Service (IRS). This is in contrast to the current Fatca proposals, which require all FFIs to report the information directly to the IRS.

The proposal, outlined in a joint statement with the US Treasury and released alongside the draft Fatca regulations, attempts to address concerns over reporting and reciprocity under Fatca.

But rather than provide clarity, the proposal adds to the confusion, says James Guthrie, associate partner at Ernst & Young UK. "The statement from the US Treasury and the five European countries poses as many questions as it answers," he says. "The whole thing is conditional upon each of those countries bringing into force a domestic law, which doesn't happen overnight."

Guthrie explains that currently there are no legal mechanisms in the UK, for example, for FFIs to report US persons back to HMRC, or indeed the IRS. This has always been a question mark where Fatca is concerned.

"A law would have to be passed to allow that to happen," says Guthrie. "If there's no law requiring banks to do this and banks act independently, customers could sue."

There are also questions regarding the efficacy of the proposals in the statement. "It is a statement of intent that I think we'd be wrong to dismiss," Guthrie says. "But I think some of the practical challenges behind it are perhaps deeper than first meets the eye."

An example of this would be the practicalities around getting data to HMRC. Guthrie points out that this will be a challenge, not least because there are currently no systems in place for this transfer of data.

But others are more optimistic about the proposal. Paul Crean, tax director, financial services practice at BDO UK, says: "It is workable. A lot of countries already have exchange-of-information provisions with the US, either with double tax treaties or through other exchange-of-information agreements they might have. It gets round a lot of the confidentiality and privacy problems."

However, Crean points out that the agreement might lead to a two-tier system for Fatca. "You're going to end up with this kind of dual system – people who are applying the sort of Fatca-lite of this new agreement and the ones who will have to apply Fatca as it currently is."

Crean also points out that while the five jurisdictions that released the statement with the US are clearly happy to take on the reporting requirements of Fatca at government level, there may be other countries that want to enter into a similar reciprocal agreement with the US without having to take on governmental responsibility for reporting. "Although this is an inter-governmental statement, I should imagine there will be governments who are not too keen on collecting information for tens of thousands of FFIs," he says. "In countries where possibly the institutional lobbying is less harsh or less severe, they may not want to be part of that aspect. They might see it as a burden and a cost."

The reciprocity aspect of the statement proposes that the US collects and reports information to the so-called partner countries in the same manner as will be done under Fatca.

This will not come as a surprise to the industry, which was expecting to see some element of reciprocity in the draft regulations, as Operational Risk & Regulation reported in January.