By NEIL HARTNELL
Tribune Business Editor
nhartnell@tribunemedia.net
A leading QC yesterday urged the Government to comply with the US Foreign Account Tax Compliance Act (FATCA) by negotiating a “hybrid agreement best suited to our national interests”, while warning that it would be “very dangerous” for the Bahamas if Europe adopted the same approach.
Brian Moree, senior partner at McKinney, Bancroft & Hughes, told Tribune Business that rather than be restricted to the two model Intergovernmental Agreement (IGA) models released by the US Treasury Department, the Bahamas should adopt Switzerland’s approach and seek a FATCA deal that protected its financial services industry’s key interests.
Noting that the IGA Model 1 and Model 2 agreements both contained “pros and cons” for the Bahamas when it came to FATCA compliance, Mr Moree said the Government needed to combine the best elements from both and seek a “hybrid” deal via direct talks with the US Treasury and Internal Revenue Service (IRS).
“I think that in our assessment of what to do, we should try to look at both models and come up with a hybrid which is deemed to be in our national interest, and negotiate that arrangement with the US authorities,” Mr Moree told Tribune Business.
Describing the “pros and cons, advantages and disadvantages” associated with the two IGA models, the leading QC said Model 1 presented “a risk that the IRS may be able to come in and audit your systems.
“As a matter of principle, bearing in mind these are businesses operating in a sovereign country, that is not acceptable to me. I would have preferred to exclude that option and if you’re going to enforce an audit, it should be done through local agencies other than the IRS.”
Model 2 also appeared to have a “narrower scope” than the other IGA version, referring to improving ‘international tax co-operation’ rather than ‘improving international tax compliance’.
That represented a positive in Model 2’s favour but, to illustrate why he was arguing for a Bahamian “hybrid” IGA, Mr Moree said Model 1 offered the potential of “reciprocity” for the other country.
Suggesting that the Bahamas needed to “think about that and get some benefits from it [FATCA compliance]”, Mr Moree added: “I don’t think we should be restricted to pushing Model 1 or 2.......
“There’s reason to believe the IRS and US Treasury will be prepared to negotiate, to some extent, on an IGA, and we should not give up on that before we start.”
Supporting his position is the recently-signed IGA between the US and Switzerland. While it closely resembled a Model 2 agreement, KPMG’s FATCA update yesterday said there were “departures and additions” from the model text - including provisions that exempted Swiss institutions from criminal prosecution for compliance.
While Model 2’s “narrower scope” was “more palatable”, Mr Moree said he personally would “lean more towards” Model 1.
Yet he reiterated: “I don’t think we should be restricted to looking at it in that compartmentalised way of either Model 1 or Model 2,” Mr Moree told Tribune Business.
“We’ve got to look at a hybrid that is more compatible with our national interests. We can probably end up with a hybrid of these two models and seek to negotiate that in good faith with the US tax authorities.
“The main point is: Let’s be smart in the way we approach it. I would urge the Minister and the Government to go a hybrid route that’s customised to meet the particular needs of the Bahamas.”
Mr Moree also warned that it was a question of when - not if - the Europeans adopted their own version of FATCA, and sought to impose it on the Bahamas and other nations.
“I don’t think there’s any question we will shortly see an OECD initiative intended to achieve a European version of FATCA. That’s almost inevitable in my view, the leading QC told Tribune Business. “I don’t think the Europeans are going to remain content with information exchange upon request.”
Despite pronouncements by the OECD that they had no plans to expand their Global Forum initiative to push the automatic exchange of tax information, Mr Moree said he believed that was their ultimate objective.
“I think it’s a moving target, and I would not be surprised if the OECD did not try to take the initiative very shortly to achieve a European version of FATCA,” he added.
“I think that’s very dangerous, not so much for the Bahamas, but all international financial centres.......
“I would not be surprised to see the OECD achieve the same result, and there is, unfortunately, an inexorable move among the international community to achieve the automatic exchange of information, and I suspect the Europeans will be pushing in that direction shortly.”
Mr Moree told Tribune Business that complying with a FATCA-type of initiative by European nations would be “extremely expensive” for the Bahamian financial services industry, just like the additional compliance and due diligence burden the US was currently imposing.
FATCA, which was brought into law in March 2010, is a set of rules set out by the US Internal Revenue Service (IRS) designed specifically to limit tax evasion by US persons living abroad.
Under FATCA, US taxpayers holding financial assets outside the US must report those assets to the IRS or face penalties. FATCA will also require foreign financial institutions to report directly to the IRS certain information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest.
FATCA agreements between the US and foreign financial institutions are supposed to be completed by 2013 year-end, with withholding set to begin in 2015.
Comments
JustMe 11 years, 6 months ago
Niel,
Interesting article.
Good luck with getting Treasury to go for a new hybrid IGA. I think you will find out how unilateral these agreements are. They have already "complexed" FATCA up enough, as it is, so really don't seem them being that receptive. If they open that door for you, then they have to open it for every country in world, and they like the unilateral nature of doing business, not real bi-lateral negotionas.
If it were me, I would have a strategy of really throwing the reciprocity aspect back in their face, as they know they can not offer it to you, Even if you don't need any or all of the complex data requirements that they are demanding from you in Article (2) (a) that they say the FFIs in the Bahamas have to supply, insist that what is good for the goose is good for the gander. And you want exactly the same back. That will give lie to how bi-lateral this process is.
They know they do not have the authority, and if Congress is forced to face up to the fatca fact, that the costs are blowing back on the homeland shores and the domestic banking industry, this might serve you well. There are those in Congress who hate even the most minor of non resident interest reporting as required by IRS Bulletin 2012-20 http://1.usa.gov/11sGZsl In the last session of Congress, the Posey legislation in the House was pretty bi-partisan against it. http://1.usa.gov/UMyJBN
One question for you, Do you have a reference that indicates this statement is true?
I have never seen any official statement that expresses this meme although I do see repeated a lot without attribution, but don't think it was actually the case. FATCA sprang out of the JCT frustration with UBS homeland tax evasion schemes. There is nothing in their official press release when they made this proposal that indicates, Americans living abroad were the target. That would be the time to lay out the goals, and it is NOT there.
http://bit.ly/V6Aee7
I think if you investigate further, you will find that Americans abroad were not given a moment of consideration when the geniuses in Congress dreamed up FATCA. They are just the after thought, or unintended consequence arising from the unique nature of Citizenship Taxation. They are not the cause of the design, they are the collateral damage.
If you have something that indicates differently, I would be interested in seeing it.
Thanks
GilbertM 11 years, 6 months ago
Niel is right.
But I fear, even though Treasury is acting extra-territorially and ultra vires, we never have a strategy in place to force them into compliance. And that is because we are NOT, very NOT, a financial centre. We are a jurisdiction that by accident and intuition began offering financial services of a low end sort, and we have continued in that vein...and now that we are facing real world forces, we think using terms like IGAs mean anything.
Mr. Moree mentioned following Switzerland. However, Switzerland is...well, bloody SWITZERLAND! and we are very NOT Switzerland.
I fear too, for the same reasons principles enshrined in the Vienna Convention on Treaties (1969), such as "reciprocity", 'agreement by force', or any other breach of comity and actual international law by the US will go unanswered. That is because you cannot be late, sloppy and unprepared and go after the largest economic force in human history.
Have we even bothered to asked ourselves what we ought to have been by now, having lived in the shadow of the American behemoth?
Its seems all we have to show for our proximity is air miles to Miami and an ever ready capitulation to Lex Americana Universalis. (The Law of America made Universal). And now we lack the discipline to do more than make safe noises this late in the game; blindly, stood naked, wailing about our fancy clothes.
Professor Gilbert NMO Morris
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