The Tribune

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.