How Other Countries Are Joining the U.S.'s Fight Against Offshore Tax Evasion

For the last five years, the U.S. has waged a strong battle against offshore tax evasion. In 2010, America began its boldest crackdown with the enactment of the Foreign Account Tax Compliance Act (known widely as "FATCA"). FATCA requires foreign financial institutions (e.g., banks, investment houses, etc.) doing business in the U.S. to implement systems that identify U.S. customers and report account information to the IRS or face a debilitating 30% withholding tax on U.S. source income.

As a matter of practice, in order to expedite the information-gathering process, foreign financial institutions often don't send U.S. account information directly to the IRS, but instead send it to the governments of the local jurisdictions where the institutions are located. To this end, the U.S. government has signed dozens of so-called intergovernmental agreements with partner countries that have agreed to digital information-exchange programs.

The Effects of FATCA

Implementing systems to identify and report account information to the U.S. government has been anything but a cakewalk for foreign financial institutions. The cost to foreign banks to comply with FATCA has been estimated at roughly $8 billion a year on a global basis. Although many banks have absorbed these costs in order to keep their U.S. customers and investments, others have begun to turn away Americans as a direct result of FATCA legislation.

U.S. citizens living abroad have felt other practical effects of FATCA. A number of prominent foreign banks, for instance, have been sending individual letters to their U.S. citizen clients requesting that they complete an IRS Form W-9 or other document in order to maintain an account at their bank. What may seem like a simple form request is in fact an initial step in a mass data-gathering process that is meant to flood the IRS with information on U.S. citizens living overseas.

The IRS, perhaps in anticipation of a FATCA spooking effect, significantly revised its tax amnesty programs several times in order to allow citizens abroad to come clean under more lenient conditions and lower penalties. The revised IRS Streamlined Procedures, for instance, have enticed tens of thousands of delinquent U.S. taxpayers over the last couple of years to become compliant with their U.S. tax-filing obligations.

Morphing Into GATCA

While the U.S. is the only major developed nation that taxes its citizens no matter where they live, it is certainly not the only country with its fair share of offshore tax evaders. Taking its cue from the U.S., the international community formalized its collective effort to combat offshore tax evasion in 2014, around four years after FATCA hit the scene.

The process began at a meeting of the Organization for Economic Cooperation and Development, where an initial group of 47 countries signed a Declaration on Automatic Exchange of Information in Tax Matters. This tentative agreement calls for participating countries to implement and adhere to a so-called "Common Reporting Standard," also known as "Global FATCA" or "GATCA." Dozens of nations have since hopped on the GATCA train.

Like FATCA and its supporting intergovernmental agreements, GATCA requires participating countries to take domestic measures to promote information gathering and to exchange information with partner countries. GATCA is much broader in scope than FATCA because instead of focusing on the citizens of one country (namely, the U.S.), it targets tax residents of over 100 countries across the globe and involves multinational data exchanges. GATCA is less punitive than its American predecessor, at least for now, as it does not impose a tax penalty on financial institutions that do not participate.

The citizens of GATCA countries should expect new bank forms, which are similar to the IRS Form W-9 that Americans have been given by banks as a result of FATCA. Just this past month, the OECD released a sample form that can be used by banks to collect data from individuals and clients.

Like FATCA, GATCA is also expected to influence the amnesty programs that countries utilize to entice citizens to come into compliance with their taxing authorities. To this end, in August of 2015, the OECD published an informative report updating the status of amnesty programs across the world.

Where We're Headed

After several years of delays and extensions, FATCA is expected to be in full swing toward the end of this year. Digital exchanges have already taken place between the U.S. and some of its partner countries, including Australia and the U.K., and the IRS expects a wealth of new information to arrive shortly.

Similarly, GATCA countries are well on their way to implementing information-exchange measures. In November of 2015, the OECD published a table summarizing the legislative progress of a number of countries adhering to GATCA. All of the countries listed in the table expect to make their first information exchanges in 2017.

What began as FATCA has clearly morphed into a much broader GATCA project. In this respect, the global community has taken a page or two from the U.S.'s strategy for combatting tax evasion. The prevailing principle seems to be that international cooperation is essential in keeping the world's taxpayers honest.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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