Financial Transparency Coalition

In 2010 Congress enacted the Foreign Account Tax Compliance Act (FATCA), which aims to combat tax evasion by U.S. citizens holding investments in offshore accounts. Under this law, the IRS and the U.S. Department of the Treasury require U.S. taxpayers holding financial assets on foreign soil to report those assets. FATCA also requires foreign financial institutions to report certain information about U.S. taxpayers directly to the IRS. The Treasury planned to phase in the law’s requirements in several stages. Starting in 2013, the IRS would require participating banks to conduct due diligence for identifying new and pre-existing U.S. accounts and reporting requirements would begin in 2014.

FATCA faced a lot of criticism from both Americans living abroad, foreigners, and heads of foreign institutions. Institutions maintained there are “huge expenses” associated with implementation; American Citizens Abroad claimed it would “destroy the lives average, honest and hard working Americans;” and other opponents called it “big brother” legislation. My own post about FATCA compliance got a lot of the same remarks.

Partly in response, the Treasury has modified its approach. I don’t agree with much of the criticism, nor do I admire the opprobrium. At the same time, however, I do believe the extended approach represents a strong, sustainable future for global tax compliance.

Here’s what it does. Rather than exclusively working with financial institutions to implement FATCA, the Treasury will work directly with governments. Under this model, the U.S.government will establish bilateral agreements that will allow for automatic exchange of tax information. In the Task Force’s ideal model, these agreements would require both the U.S. and partner governments to collect data from their own financial institutions on income, gains, and property paid to non-resident individuals, corporations, and trusts and then automatically provide that data to their partner countries. In practice, these may look slightly different.

The Treasury has already completed one bilateral agreement with the United Kingdom and is in the process of finalizing others with a broad suite of other countries including: France, Greece, Canada, Ireland, Isle of Man, the Netherlands, and Norway. They’re also engaging with a broad range of countries, some of which would make very interesting partners, including the Cayman Islands, Cyprus, Estonia, Liechtenstein, Malaysia, and Malta.

In the long-run this is a strong, sustainable approach because it’s two-sided. The U.S. Treasury will benefit by reducing tax evasion in offshore banks, but those foreign countries will also benefit as they strengthen their own tax compliance. As Heather Lowe, legal counsel and director of government affairs at GFI, noted: “The U.S. should not be a safe haven for the dirty money of foreign tax evaders, just as foreign financial institutions should not harbor the illicit assets of U.S. tax evaders.”

This complementary approach is balanced, which may be more palatable to its opponents, but even better, it’s a more sustainable model for increasing global tax compliance. We shall see what the world says.