Exchange of information
TALLINN UNIVERSITY
School of Governance, Law and Society
Law curriculum
International Tax Law
Sampo Järvinen
Exchange of information
TALLINN UNIVERSITY
School of Governance, Law and Society
Law curriculum
International Tax Law
Sampo Järvinen
- General definition
- OECD
- FATCA + Issues
- CRS
- Comparison
- In a globalizing economy taxpayers gain more freedom to move between different regions of the world
- Tax authorities are restrained by national borders
Tax evasion
- A need for bilateral and multilateral information exchange agreements
OECD
OECD Model tax Convention Article 26
1. The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention. The exchange of information is not restricted by Articles 1 and 2
OECD
OECD Model tax Convention Article 26
2. Any information received under paragraph 1 by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to the taxes referred to in paragraph 1, or the oversight of the above. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. Notwithstanding the foregoing, information received by a Contracting State may be used for other purposes when such information may be used for such other purposes under the laws of both States and the competent authority of the supplying State authorises such use.
OECD
OECD Model tax Convention Article 26
3. In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation:
a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;
b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;
c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy (ordre public).
OECD
OECD Model tax Convention Article 26
4. If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph 3 but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information.
OECD
OECD Model tax Convention Article 26
5. In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person.
- FATCA promotes cross border tax compliance by implementing an international standard for the automatic exchange of information related to US taxpayers. FATCA regulations require tax authorities to obtain detailed account information for US taxpayers on an annual basis.
- FATCA is intended to increase transparency for the Internal Revenue Service (IRS) with respect to US persons that may be investing and earning income through non-US institutions. While the primary goal is to gain information about US persons, FATCA imposes tax withholding where the applicable documentation and reporting requirements are not met.
- Currently 113 countries fall under the regime
FATCA
The US withholding and information reporting regime under the Foreign Account Tax Compliance Act of 2010
FATCA
- The FATCA rules require a “foreign financial institution” (“FFI”) to enter into, and to comply with, a reporting and withholding agreement (“FFI Agreement”) with the IRS.
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An FFI that enters into an FFI Agreement is referred to as a “Participating FFI.”
- An FFI that does not enter into an FFI Agreement (referred to as a “Non-Participating FFI”) would be subject to a 30% gross withholding tax on withholdable payments, unless it is otherwise exempted from the FATCA regime.
- Foreign entities that are not FFIs (“NFFEs”) and that do not qualify for an exemption will be subject to less demanding requirements to avoid FATCA withholding on withholdable payments. An NFFE will be required to provide the withholding agent with the name, address and TIN (Tax Identification Number) of each of its “substantial US owners,”4 or to certify that it does not have any substantial US owners.
FATCA
- Participating FFI generally must agree to collect and report to the IRS information with respect to
- (1) US persons that hold “financial accounts”
- (2) substantial US owners of certain NFFEs, unless certain exceptions apply with respect to the account or the payee.
- In addition, a Participating FFI must agree to withhold on payments to Non-Participating FFIs and “recalcitrant account holders,” i.e., those that do not provide the information that the Participating FFI is required to furnish to the IRS under its FFI Agreement.
FFI agreement
Issues
- Benefit vs. cost
- The cost of implementing FATCA has been estimated by various foreign governments, banks, chambers of commerce, and financial media, at anywhere between $200 billion and more than $1 trillion.
- The created revenue is estimated at $13,5 billion
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Account closures
- Due to the costs and complexity of implementing this legislation, many banks have been excluding U.S. persons from holding financial accounts at their institutions
Issues
- Identity theft
- Identity thieves are using fraudulent compliance requests as a method to obtain sensitive account-holder information.
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Complexity
- Nina Olsen in regards to FATCA: "This is a piece of legislation that is so big and so far-reaching, and [has] so many different moving pieces, and is rolling out in an incremental fashion (...) that you really won’t be able to know what its consequences are, intended or otherwise"
CRS
- A global reporting standard for the automatic exchange of information (AEoI).
- Developed by the Organization for Economic Cooperation and Development (OECD)
- The goal of CRS is to allow tax authorities to obtain a clearer understanding of financial assets held abroad by their residents, for tax purposes.
- More than 96 countries have agreed to share information on residents’ assets and incomes in conformation with reporting standards.
CRS
- The name, address, TIN and date and place of birth of each Reportable Person.
- The account number
- The name and identifying number of the Reporting Financial Institution;
- The account balance or value as of the end of the relevant calendar or, if the account was closed during such year or period, the closure of the account
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The details and formatting of the provided information are covered in a rulebook of hundreds of pages.
Exchangeable information
| Major differences | CRS | FATCA |
|---|---|---|
| Reportable accounts | Defined individually | U.S Citizens |
| Reporting financial entity | Broad definition | Narrow definition |
| Minimum reportable sum | No limit | 50,000$ |
- However, the court decided that all of the plaintiffs lacked standing to sue in various ways. In particular, they had failed to establish that they had suffered an injury caused directly by the Treasury, IRS or FinCEN.
"No individual plaintiff has suffered an invasion of a legally protected interest, which is concrete and particularized, and actual or imminent, not conjectural or hypothetical. Moreover, no alleged injury is fairly traceable to the actions of the defendants, but rather, the actions of an independent third party. Finally, there are no allegations that it is likely that the alleged injury will be redressed by a favorable decision."
Mark Crawford, et al vs. United States Department of the Treasury, et al (No. 3:15-CV-00250)
- In their introduction to the case, the plaintiffs stated that the FATCA and FBAR "laws and agreements impose unique and discriminatory burdens on US citizens living and working abroad," and that "the challenged provisions are unconstitutional and the defendants [Treasury, IRS and FinCEN (Financial Crimes Enforcement Network)] should be enjoined from enforcing them."
- The plaintiffs called IGAs unconstitutional, as they had not been submitted to the US Senate for its advice, consent or approval, while they also "nullify the right of individuals to refuse to waive foreign privacy laws that would otherwise prohibit their banks from disclosing their account information to the IRS."
- Furthermore, it was noted that the FATCA and FBAR reporting requirements "require US citizens living abroad to report more detailed information about their local bank accounts than US citizens living in the United States."
- Finally, it was claimed that the 30 percent "tax" imposed by FATCA on payments to foreign FIs when they "choose not to help the IRS pry into the bank accounts of their US customers … is not a tax at all but rather a penalty designed to accomplish indirectly through financial coercion what the US government cannot mandate directly through regulation."
Mark Crawford, et al vs. United States Department of the Treasury, et al (No. 3:15-CV-00250)
Mark Crawford, et al vs. United States Department of the Treasury, et al (No. 3:15-CV-00250)
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Plaintiff Crawford seeks to invalidate FATCA and the FBAR requirements on three bases
- His brokerage firm cannot accept U.S. citizens—including Crawford himself—as clients, due to a relationship with a bank that has a policy against taking on American clients,
- He does not want the "financial details of his accounts" disclosed to the U.S. government
- He fears "unconstitutionally excessive fines if he willfully fails to file an FBAR.
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Sought to stop the enforcement of both the intergovernmental agreements (IGAs) negotiated by the US Treasury Department and the Internal Revenue Service (IRS) with other foreign jurisdictions to enforce FATCA, and also the account reporting requirements of both FATCA and FBAR (Report of Foreign Bank and Financial Accounts.
- An FBAR must be filed with the Financial Crimes Enforcement Network (FinCEN) by American taxpayers who have one or more bank or financial account located outside the United States, or signature authority over such accounts, whose aggregate value exceeds USD10,000 at any time.
Mark Crawford, et al vs. United States Department of the Treasury, et al (No. 3:15-CV-00250)