The Economist series on offshore, published as a special report this week, has some powerful nuggets within it.
I was talking about automatic information exchange in the Canadian parliament yesterday, and it's good to see the Economist reflecting much of what I said. As they note the OECD solution to information exchange, the tax information exchange agreement, does not work (as I said yesterday):
The OECD touted this as a step towards transparency that would also respect individuals' right to confidentiality as much as possible. But tax investigators complain that the process for getting information is cumbersome and the bar has been set too high. “You already have to have pretty much all the information you're after to get the last piece. It's a catch-22,” says one. That may explain why the number of requests made has been small.
I've been saying that since 2009.
It is good to see FATCA and its problems discussed too. As they note:
An OECD tax official describes the law as “awful, in a way, like a nuclear bomb” but also sees it as “a remarkable leap forward for transparency”.
They're right, but it's going to happen anyway, and spread. As first reported here:
Inspired by America's chutzpah, other countries are drawing up similar legislation of their own. Britain is planning to impose a so-called “Son of FATCA” on its dependencies. The Isle of Man has already agreed to this; its chief minister accepts that automatic exchange “is becoming the global standard”. Jersey and others are holding out for now, but will come under increasing pressure to sign up. “It's the last days of the Roman Empire,” mutters a senior Cayman lawyer.
Also important is the fact that many of the futile counter arguments to automatic information exchange from places like Jersey are dismissed:
Tax campaigners argue that appropriate checks and balances can be put in place in most countries. Governments in the developing world already have access to lots of sensitive information about their citizens. And the biggest benefit of automatic exchange is that it deters rather than detects, says John Christensen of the Tax Justice Network (TJN).
Quite so. But then places like Jersey don't want to deter a trade we want to stop. And that's the simple explanation for the difference of view. You're for or against deterring g tax crime. Some aren't against it. The Tax Justice Network is, and it's now very clear that the view of those who think criminality must be stopped will prevail.
That's why I think we're winning, as the Economist clearly concludes.
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There is a strong possibility that both FATCA and the potential “son of FATCA” will remain rather exceptional arrangements.
The United States are in a unique position to impose FATCA because they represent 40% of the world economy, have by far the deepest and most sophisticated financial markets and control the world’s reserve currency. The UK may be in a position to impose the “son of FTACA” on its associated territories and dependencies because of their unusual constitutional arrangements.
No other nation or group of nations enjoy similar leverage, except possibly China in the long-run. The EU has been trying for over a decade to promote automatic information exchange, but it can not even reach agreement among its own member states on this issue, and would be laughed at if it tried to impose it on Singapore, Hong Kong or even Israel. It was very indicative of their weakness that the European governments which signed inter-governmental agreements with the United States for the implementation of FATCA had to agree to very limited reciprocity clauses, which for instance excludes non-transparent entities in Delaware and other states.
I am not a fan of FATCA, it is too complicated
But the political will for automatic IE exists now – and EU progress is now inevitable thanks to FATCA
So I am afraid you are just wrong
Mr Murphy,
There has always been a political desire in the EU, at least at the level of the Commission, to fully implement AIE, but it has always failed in the face of the opposition of certain member states and the need for unanimity. Some argue that FACTA and the MFN clause have changed the balance of power between the Commission and the recalcitrant member states, but that is far from certain (I’ll write a separate reply to Mr Morris about this).
In any event, whatever happens within the EU won’t matter much to places like Singapore, the Bahamas, Hong Kong or Israel. Even Switzerland is a non-EU nation and is in a strong position to rebuff the Commission.
… and what say ye about the knock on effect of FATCA due to most favoured nation (MFN) clause. Germany has already officially said once LU and AT sign FATCA then they’ll ask for AEI with those Member States. And Semeta has said he will sue them as well. So much for only EU MS demanding AEI due to the MFN clause…
Mr Rubio
I’m afraid to tell you that model-2 of FATCA is merely a dressed up version of AEI. If you don’t agree that the bank hands your info automatically, then the US merely asks for the list of recalcitrant customers, and voila .. they get it. Kinda like saying, “no you don’t have 4 Aces against me, you’ve only got two pairs of Aces”.
Re: Germany going to insist LU and AT go to AEI when they sign FATCA.
Mr Morris,
I am sure that the Commission will indeed try to make the argument that the model-2 FATCA agreement is AIE in disguise and may get some political mileage out of this
The legal foundations are debatable. To start with any information about recalcitrant account holders is made under group information requests according to the new OECD standards for this type of administrative assistance. More importantly however, the standard model-2 (as signed by Japan, Switzerland’s is slightly different) only requires financial to register with the IRS, but not to enter FFI agreements, so that the financial institutions could (in theory) take the decision not to comply with FATCA. The only reason that banks would never take this route is that they would be immediately out of business due to the 30% withholding tax.
Thank you for the links regarding Germany. I am not sure that a comment made to a local newspaper by a regional tax manager, in a state controlled by the SPD opposition, amounts to a statement of position by the Federal government. But it is interesting nonetheless.
Mr Morris
I was not aware of Germany’s demands, but it seems very strange that it would make an official statement on the purely speculative basis that LU or AT would enter FATCA agreements, and ignoring what shape these agreements may take.
Mr Semeta has a long track record of over playing his hand on the issue of AIE (witness how he tried to block the bilateral Swiss agreements, but was then completely humiliated when the UK simply passed domestic legislation to by-pass his objections).
As you know, there are two types of model inter-governmental agreements that the US government has developed its FATCA treaty partners: In one model (IGA1), the treaty partner’s government collects data from financial institutions in its jurisdictions and passes it to the IRS. In the other model (IGA2), the treaty partners’ banks register with the IRS and pass the data directly.
The difference is crucial because in IGA2 there is no automatic exchange of information at the government level. The treaty partner’s government directs the banks to register with the IRS and enables them (for instance by adjusting certain domestic privacy laws) to comply with FATCA requirements. The ultimate decision to exchange information sits with the bank and not with the treaty partner’s government. The US have a real stick under FATCA with the threat of a 30% withholding tax on all US Dollar transactions entered by non-complying institutions; this is a threat that EU member states cannot make against LU and AT.
Indications are that LU and AT are negotiating their FATCA agreements on the basis of IGA2. If so, they could perfectly take the legal view (if not the political one) that they are not agreeing to AIE at the inter-governmental level, but only leaving it to their financial institutions to exchange information at their discretion.
It looks like there is much more to this most favored nation clause than meets the eye at first reading. Mr Frieden has stated several times that its legal implications are unclear, and that any FATCA-related pressure on LU to agree to AIE will be of political nature.
Diplomatic with an iron fist in it I think