Exchanging Information on Bank Accounts: America Wants Much and Gives Little

The pressure grows for the automatic exchange of information between industrialized countries on tax matters. This is why the Organization for Economic Cooperation and Development recently introduced standards for AIE’s execution. One does not have to like AIE, which contradicts the principle that information should first flow when there is a substantiated suspicion of tax evasion or fraud. However, the trend lies in this direction, and everyone should play by the same rules. Only through compliance will we preserve the balance between “give and take.” As the model for its standards, the OECD used the Foreign Account Tax Compliance Act with which, beginning in July 2014, the U.S. can demand detailed information about U.S. citizens from financial institutions worldwide. Yet the U.S. only grants its partner states very limited reciprocity under FATCA; while according to the OECD standards, Washington may act pursuant to its own interests.

The Veil of Secrecy Remains

The OECD standards demand that banks lift the veil of secrecy from investment companies. They must establish who controls such financial vehicles and report this information to the tax authorities of participating countries. Banks must also look into investment companies from signatory states under FATCA. Should a non-U.S. bank find that Americans hold a substantial interest — more than 10 percent — in a company, it must pass this information on to U.S. officials.

American banks do not have to research the beneficiaries to such accounts under FATCA. Furthermore, the OECD standards provide for special treatment for the U.S. For example, U.S. banks do not have to screen “passive nonfinancial foreign entities” from states that do not have a FATCA agreement with the U.S. According to Hans-Joachim Jaeger of Ernst & Young in Zürich, such entities include trusts and corporations with unregistered shares. This is hardly a marginal number of institutions, as the OECD would portray it. The United States’ special treatment not only reduces the costs for American financial institutions compared to their European competition, it also undermines the principle of reciprocity.

Less Burden for US Banks

Jaeger provides an example. Suppose that a corporation based out of a “tax haven” like Vanuatu or Belize has an account in a U.S. bank, and its beneficiaries are European. If the corporation holds U.S. securities, it must simply certify for the bank that no American holds a substantial interest in it. The situation is thus settled for the U.S. bank. At most, the bank has to collect a 30 percent withholding tax on certain profits, because Vanuatu and the U.S. do not have a double taxation treaty.

Things change if the Vanuatu corporation does not hold any U.S. securities. As Jaeger explains, under both FATCA and OECD standards, a Swiss or a German bank would have to determine the beneficiaries behind the Vanuatu corporation. If they determined that the persons who hold a controlling interest came from the U.S., under FATCA, or another participating state, under OECD standards, they would have to convey this information to the relevant country.

Unpalatable Special Treatment

How does the OECD justify special treatment for the U.S.? Pascal Saint-Amans, Director of the OECD’s Centre for Tax Policy and Administration, argues that FATCA has substantial advantages over the OECD standards, and that the 30 percent “penalty tax” on income and proceeds of U.S. beneficiaries provides significant pressure on states to conclude FATCA treaties with the U.S. government. Thus, the U.S. has signed FATCA agreements with British crown colonies like the Isle of Man or Guernsey, as well as with British overseas territories such as Bermuda or the Cayman Islands; it is in talks with Panama. Of course, this explanation misconstrues the reasons for the lack of U.S. reciprocity, which are to be sought in the U.S. itself: American banks are under no obligation to identify the beneficiaries behind convoluted webs of corporate ownership.

Were it up to the U.S. Treasury Department, this would change. In March 2012 it floated a corresponding proposal. Hearings on the proposal will be held already this year. But even if banks were to collect the relevant information, it does not automatically follow that it would be transmitted to FATCA partners or OECD member countries. The Treasury’s proposal is more concerned with internal bank documents that pertain to crimes like money laundering and the Justice Department’s ability to access them. In order to transmit information over beneficiaries automatically to their respective home countries, a further regulation would be required, says Brian Kindle of the Association of Certified Financial Crime Specialists in Miami. There is no current talk of this.

A Small Step for the U.S.

Quotation marks need to be put around “reciprocity” in regards to FATCA, says Allison Christians, Professor of Law at McGill University in Montreal. The Americans have made this promise to their FATCA partners, but until now have only made small steps in this direction. For example, since 2013 U.S. banks have had to report to U.S. tax authorities interest payments made to foreigners of $10 or more. In principle, this information can be communicated to the relevant FATCA partner state. The time may soon be over when someone from Mexico, Germany or Italy will be able to hide money in the U.S. Of course, this rule only affects the accounts of natural persons, not legal — i.e. corporate — bodies.

The United States is not at all interested in a balanced exchange of information, says Professor Christians. Political support for it is simply lacking. For Washington, tax evasion by Americans takes priority. Like Switzerland, the U.S. does not belong to the 42 countries and territories — which include the largest EU countries and smaller states like Liechtenstein and Luxemburg — that to date have explicitly backed the OECD initiative. Furthermore, Washington is a long way from being able to comply with the standards that were written there — which arguably explains its special treatment. For the time being, the U.S. shall accept behavior from its banks that it has held against other countries for years.