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FATCA Is Far from a Done Deal

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By Jon Matonis
American Banker
Monday, April 1, 2013

Largely affecting those banks outside of the U.S., the Foreign Account Tax Compliance Act
requires all foreign financial institutions to report the activities of
their American clients to the Internal Revenue Service. But given the
recent demands from other nations hinting at reciprocity, the
overreaching legislation could impact banks and financial institutions
in the U.S. as well.

Now, there is the additional element of
certain key countries rejecting FATCA outright, and the Asia-Pacific
region could end up holding the most sway.

Cited as a hindrance
to foreign investment that would ultimately dampen U.S. economic growth
and threaten American jobs, the FATCA penalties for noncompliance
provide a strong incentive for overseas investors to avoid U.S.
depository institutions altogether. Tax Management International Journal cites 11 reasons why FATCA must be repealed. Reason number one is “the height of arrogance.”

It is either the reciprocity angle or the cascade effect of China’s reluctance that has the greatest potential to derail FATCA.

United States should be moving toward full reciprocity,” Georgetown Law
School Professor Itai Grinberg, a former Treasury official, told
Reuters. He added that it would be “deeply hypocritical” for the U.S.
to ask for information on American taxpayers “without offering some kind
of reciprocity.”

Because direct reciprocity may mean foreign
banks violating the privacy laws of their own jurisdictions, the
Treasury Department has started negotiating bilateral agreements so that
foreign governments can aggregate the bank data necessary for the IRS.

Brian Mahany of Mahany & Ertl, a law firm specializing in offshore
reporting and compliance, believes that reciprocity is a bit misleading.
“We are one of the few countries that tax based on worldwide income.
Reciprocity isn’t as important to most other nations,” he added.

the U.S. is one of the worst offenders globally when it comes to tax
havens and “secrecy jurisdictions.” For instance, Mahany said “many
people, including Chinese nationals, hide money here.” While President
Obama has asked Congress for reciprocity, he is dealing from a position of weakness. “The support for FATCA is not very strong,” Mahany added.

with global financial transparency on the increase and more countries
considering taxation on citizen’s worldwide income as a way to combat
growing budget deficits, reciprocity with U.S. financial institutions
starts to look appealing.

On the China issue, Mahany concedes
that the U.S. government will never get every nation to join FATCA and
the Asia-Pacific countries are heavily influenced by Beijing. He states,
“China is certainly an important player. Currently, none of the
Asian-Pacific countries are signed up, although Japan will probably be
the first. Without Singapore, China, Hong Kong and Macau, FATCA faces
real challenges.”

James Jatras of the Repeal FATCA campaign claims that Hong Kong, like the People’s Republic of China, is not even on the list of 50 countries the Treasury claims to be negotiating with.

will probably be so few U.S. citizens holding bank accounts in China
that the cost of implementing FATCA outweighs the benefit to China’s
financial institutions. Also, the Chinese taxpayers with U.S. bank
accounts appear to be of minimal interest to the Chinese government,
according to Lisa Smith of

rushing to safe keep all your money in Communist China, remember that
even if China elects to ignore FATCA, they may still cooperate with the
IRS on a case-by-case basis,” according to Mahany. China and the U.S. signed a Mutual Legal Assistance Agreement in June of 2000.

none of this potentially disruptive turmoil means that financial
institutions should put FATCA-related IT infrastructure plans on hold
until China makes its decision, because foreign banks and other
financial institutions are currently ill-prepared for FATCA.

to Mahany, “Implementation has been delayed once but folks should not
depend on that happening again. The penalties for not complying outweigh
the risks of noncompliance.”

Meredith Moss of Finomial believes
“that a technology solution is the only way to go, given the tremendous
amount of data, PDFs and paper documents to sift through.” She says that
banks moving forms online and creating a comprehensive FATCA audit
trail will demonstrate diligence to the regulators and that “due
diligence should be underway by January 2014 and completed by July

Although experts in the FATCA preparation business tend to
agree that moving forward with expensive FATCA compliance plans is the
prudent and logical step to be taking now, a comprehensive and worldwide
FATCA rollout is far from a foregone conclusion. For those financial
institutions and their shareholders offended by the overreaching
legislation and lack of respect for mutual sovereignty, the cost savings
alone may start to make FATCA’s non-compliance penalties look


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