FATCA’s Place in History: a Brazilian Case Study
Andrés Felipe Ramírez Ocampo
Advogado e Economista formado na Universidad de los Andes, Colômbia. Mestrando em Direito Tributário Internacional e Desenvolvimento pelo IBDT. Advogado em São Paulo. E-mail: email@example.com
Resumo. Este artigo contém uma visão geral da introdução da Lei de Cumprimento do Imposto sobre Contas Estrangeiras – FATCA nos Estados Unidos e alguns dos eventos históricos relevantes à sua promulgação, bem como relatos escritos de seus efeitos, particularmente no que diz respeito à sua implementação no Brasil. A pesquisa realizada também inclui uma análise do Acordo Intergovernamental do FATCA atualmente em vigor no Brasil e descreve seus efeitos para os contribuintes brasileiros com contas estrangeiras nos Estados Unidos detidas por meio de pessoas jurídicas. O artigo termina com uma conclusão e algumas questões para debate.
Palavras-chave: FATCA, acordos de intercâmbio de informações, transparência fiscal, Convenção sobre Assistência Administrativa Mútua em Matéria Fiscal – GATCA
Abstract. This paper contains an overview of the introduction of the Foreign Accounts Tax Compliance Act – FATCA in the United States and some of the historical events relevant to its enactment, as well as written accounts of its effects, particularly as regards its implementation in Brazil. The research performed also includes an analysis of the FATCA Inter-Governmental Agreement currently in force in Brazil and outlines its effects for Brazilian taxpayers with foreign accounts in the United States held via legal entities. The paper ends with a conclusion and some questions for debate.
Keywords: FATCA, exchange of information agreements, tax transparency, Convention on Mutual Administrative Assistance in Tax Matters – GATCA
Several scholars 1 have claimed that FATCA set the scene for global initiatives of exchange of information to take place. The end of bank secrecy, a sine qua non objective to attain automatic exchange of information (MORSE, 2012), has been expedited via lobbying of the banks themselves, in a sheepish struggle to comply with FATCA requirements lest withholding was enforced on them in the American market (Cotorceanu, 2015).
This, however, seems to be an oversimplified version of efforts undertaken on a global scale way before the events that led to FATCA being enacted took place. Also, in a broader sense, it seems unfair to place FATCA in such a prestigious place in history given its downfalls (COTORCEANU, 2015), which are proving to be the Achilles’ heel of global tax information exchange.
An (im)moral introduction
Minstrels of the tax planning community like to tell a post-modern parable to their clients and colleagues – coined shortly after the IGA between the US and Brazil was signed – about a certain Brazilian taxpayer “X” who chose to invest in the US for reasons undisclosed. As the tale goes, this Brazilian taxpayer had a brother, Brazilian taxpayer “Y”, who was also interested in investing abroad, and decided to join X in this exciting venture.
Y made it clear to X from the start that he had no interest in tax evasion (Y, you see, is the good guy in this story), and X agreed to counsel Y on what to buy, but he promised not to meddle with the way in which Y channeled his investment from Brazil.
Having agreed on the terms, both brothers purchased real estate, stock, securities and Bitcoin derivatives (why not?) which became quite lucrative. Unaware of Brazil’s universal taxation system and having failed to seek tax advice in any of the jurisdictions involved, Y invested directly as an individual in all of these assets, and duly informed his American bank of his nationality and his Brazilian taxpayer identification number (CPF), without filing returns or paying any taxes in Brazil regarding his investments in America.
Years later, Y found himself been audited by the Brazilian Federal Revenue Service for tax evasion and tax fraud, facing criminal charges and fines of almost twice the amount of taxes he initially owed, plus interest. In despair, Y paid all of his outstanding tax liabilities and was left with a meager portion of what he had earned from his initial investment, as well as a criminal record.
X, on the other hand, invested through a double-tier structure in a tax haven and a C – corporation LLC in the US and, being an adventurous investor, never reported or disclosed any of his foreign assets and operations to Brazil. Sure enough, after years of accumulating his fortune abroad and using his American credit card to travel through Europe and buy all sorts of completely legal (and surely necessary) items, well, nothing happened.
In 2017, X took advantage of a Brazilian law that allowed voluntary disclosure of assets held abroad and brought the dollars he had accumulated in the US back to Brazil, paying a small fraction of what he had earned and easily offsetting the taxes he paid with a fraction of the return from his investments, factoring-in the effect of the sky-rocketing FX rate. All of X’s tax mischiefs where instantly cleansed, with his corporate structure still in place and unharmed.
The moral of this story is the following: FATCA lets you hide your money from your home country in plain sight as long as: (i) you own that money in America; and (ii) you do so through a legal entity.
The purpose of this Article is to explore, from the Brazilian perspective as a case study, how a jurisdiction that relies so heavily on reciprocity and is so keen on instituting and harshly enforcing all sorts of ancillary obligations to keep a close track of what its taxpayers earn abroad ended up accepting to implement and enforce a treaty that involved overhauling the local banking industry, at a great expense for its local banks and for expatriate Americans, in exchange for limited information.
To do this, I have divided this Article into seven sections and a conclusion. The first ones concern the context of global events that lead to the enactment of FATCA (told through keynote events), then I briefly explore the shift of paradigm regarding bank secrecy laws and regulations in Brazil that allowed FATCA to be implemented, and finally I draw some comparisons between the obligations assumed by both parties in a FATCA agreement and discuss why the statement that “FATCA is the catalyst event that triggered the current wave of global automatic exchange of information” is false. The conclusion draws from the previous sections and places some debate points regarding the future of America as a haven for the world’s more ‘discrete’ fortunes.
What were they thinking?
FATCA is not as easy a target for criticism as it seems today. It turns out that global events leading to FATCA meant that the roots of this Act did not necessarily lie on sound public policy initiatives concocted over years of commission debate, but in a heavily political, reactionary response to widespread (and heavily mediatized) public outcry (SCHOUERI, 2013) (TELLO, 2014).
Perhaps the best way to illustrate this is through the life experience of Mr. Bradley Birkenfeld (Mr. BB, for short), an American Banker who worked for UBS Switzerland AG in the late 00’s. Mr. BB saw the whistle-blowing potential involved in letting the IRS know about some of his American clients and their undeclared accounts in Switzerland, so one day he took as much information as he could from his computer, went to America, and contacted the IRS claiming that he wished to assist the government in reclaiming millions in unpaid taxes in exchange for a modest whistleblower’s fee.
The scale of the Pandora’s box that Mr. BB opened that day has been replicated in ripples through the years, albeit recently the efforts are not undertaken by disgruntled opportunists alone – the Panama papers are a good example of this.
After the information Mr. BB surrendered went public, the IRS promptly began to collect due taxes on the undisclosed amounts in Switzerland. Although Mr. BB was (and very much still is) considered a traitor by Swiss law (GONZALEZ, 2010), American law supposedly had to reward him with a “finder’s fee” of 10% of the tax money recovered through the information he provided. Expecting a fat paycheck, Mr. BB was little less than surprised when he was awarded a warrant for his arrest and a fine of 30 thousand US dollars for his criminal activities (aiding others hide their money was part of his job description at the time (JUSTICE, 2009)).
One wonders what Mr. BB thought in his cell after the dust settled, perhaps that mafias around the globe were right in frowning upon whistleblowing in general, or that his ill-motivated actions were entirely compatible with his ensuing karma. Eventually though, Mr. BB was released and paid little over 100 million US dollars for his services – a full ten years after his exploits in Switzerland took place.
The UBS scandal, as the aftermath of Mr. BB’s desertion was called, resulted in evidence that a significant (and obscure) amount of resources belonging to American taxpayers was hidden in bank secrecy strongholds around the world (JUSTICE, 2009) – a statement that was previously known by everyone to be true, but turned out to be too abstract for people to actually move against it. This changed in the second decade of the new millennium, as scandal after scandal ensued and the world noticed that hiding money from the IRS was not only profitable, but easy.
This placed lawmakers on both sides of the political spectrum in a dilemma. Passiveness or largely symbolic legislation would not look good to the ordinary working-class citizen, particularly with the whole media establishment closely analyzing the outcomes of the expected heavy-handed response by Congress. On the other hand, reining back too harshly on basic capitalist freedoms such as the free movement of capital and the (very legitimate) effort to save money on taxes worldwide would prove disparaging for the wealthier constituents that relied on those very freedoms for their day-to-day business in globalized America.
The outcome, rather surprisingly, largely favored the former approach. Inexplicably, and considering other, less budget-related Congress initiatives, the final version of FATCA left little leg room for American taxpayers to deal with the consequences. Put simply, FATCA was an efficient mechanism to coerce banks (MORSE, 2012) all over the world to disclose American ultimate beneficial owners (UBOs) under almost all circumstances (excepting some grandfather accounts and accounts with amounts under the threshold).
The impact was so profound, and the consequences so unexpected (a usual by-product of hasty legislation) that Kafkian examples of American nationals seriously impacted by FATCA in a different continent where reported. Such is the case of one Mr. Kuettel, who would later testify before the U.S. House of Representatives Subcommittee on Government Operations, under oath, regarding the veracity of his ordeal (KUETTEL, 2017).
The facts of what Mr. Kuettel went through are the following: Mr. Kuettel is an Army Veteran who decided to search for job opportunities in Europe after the collapse of the financial market in 2008. He is not a wealthy man and has never been, he has earned paychecks all his life and depends on financial services to pay for his house and his car. After a long period looking for opportunities, he was finally employed by a Swiss company, and moved to Switzerland with his family. Bear in mind that this is an American working in Switzerland, living in Switzerland and paying taxes there. Naturally, when Mr. Kuettel asked for a mortgage to his local bank, he was able to finance his home in Switzerland.
Come 2012, however, when Mr. Kuettel attempted to re-finance his mortgage with his bank, the loan was denied. Mr. Kuettel found himself with no means to secure sufficient payments to keep his house and was required by local banks to either close his account, which was a widespread solution implemented by Swiss banks at the time, or search for another bank. Eventually, Mr. Kuettel found a bank that would take him in, yet following FATCA this bank required him to waive Swiss privacy regulations and to provide full disclosure of his past and future income to the IRS. Left, as Mr. Kuettel claims, “with no choice”, he renounced his US citizenship and settled permanently in Switzerland.
Many American expatriates went through the same experience. FATCA easily ripped though the borders of sovereign nations (TELLO, 2014), meaning that American nationals could be discriminated against based exclusively on their nationality, because their government forced local banks to do so.
This raises the question, then, of what could this Act possibly contain that resulted in such a reaction by banks all over the world.
The Santa Clause – § 1471 (b)(1) of the IRC
“He [Santa] knows if you’ve been bad or good, so be good, for goodness sake! You better watch out! […]”. This happy Christmas warning fits § 1471 (b)(1) of the Internal Revenue Code of the US nicely, provided that the local financial institution agrees to inform the IRS what it requires. After FATCA, financial activities of most American nationals abroad became visible and traceable by the IRS on a yearly basis, with little alternatives to prevent information from getting back to America.
Furthermore, depending on the type of Intergovernmental Agreement (IGA) (TELLO, 2014) between the reporting jurisdiction and the US, tax information regarding American nationals, whether tax residents or not in the local jurisdiction, would flow through local tax authorities or, in some cases (including in the case of Mr. Kuettel, above) directly to the IRS.
- 1471 (b)(1) of the IRC reads as follows:
“(b) Reporting requirements, etc.
1) In general, the requirements of this subsection are met with respect to any foreign financial institution if an agreement is in effect between such institution and the Secretary under which such institution agrees—
(A) to obtain such information regarding each holder of each account maintained by such institution as is necessary to determine which (if any) of such accounts are United States accounts,
(B) to comply with such verification and due diligence procedures as the Secretary may require with respect to the identification of United States accounts,
(C) in the case of any United States account maintained by such institution, to report on an annual basis the information described in subsection (c) with respect to such account,
(D) to deduct and withhold a tax equal to 30 percent of—
(i) any passthru payment which is made by such institution to a recalcitrant account holder or another foreign financial institution which does not meet the requirements of this subsection, and
(ii) in the case of any passthru payment which is made by such institution to a foreign financial institution which has in effect an election under paragraph (3) with respect to such payment, so much of such payment as is allocable to accounts held by recalcitrant account holders or foreign financial institutions which do not meet the requirements of this subsection,
(E) to comply with requests by the Secretary for additional information with respect to any United States account maintained by such institution, and
(F) in any case in which any foreign law would (but for a waiver described in clause (i)) prevent the reporting of any information referred to in this subsection or subsection (c) with respect to any United States account maintained by such institution—
(i) to attempt to obtain a valid and effective waiver of such law from each holder of such account, and
(ii) if a waiver described in clause (i) is not obtained from each such holder within a reasonable period of time, to close such account.
Any agreement entered into under this subsection may be terminated by the Secretary upon a determination by the Secretary that the foreign financial institution is out of compliance with such agreement.”
Here, four points merit special consideration:
- i) FATCA targets foreign financial institutions as proxy withholding agents for taxpayers and for other foreign financial institutions that do not agree with FATCA requirements, meaning that foreign financial institutions attempting to implement bank secrecy legislation locally and not willing to implement FATCA have to deal both with the IRS and with other foreign financial institutions domestically and in third-party jurisdictions (Morse, 2012);
- ii) note that the drafting of (1) refers only to financial institutions themselves, which indicates that, originally, FATCA was not designed to deal with restrictions instituted by local legislations against any form of information exchange, but as a private deal (a contract, of sorts) that appealed to decision-making faculties and range of action of foreign financial institutions – irrespective of their governments;
iii) (F) only confirms (ii) above in offering foreign financial institutions with accounts belonging to American nationals two choices: either they obtain valid and effective waivers from their clients whereby they renounce the benefits of any laws that protect them from having to disclose their tax information; or they simply closed the account; and
- iv) irrespective of the burdens involved in having to comply with the information gathering and reporting obligations that this contract entails, pursuant to (E) foreign financial institutions simply have no way of knowing the scope and reach of the information that will be requested for exchange, which is left open-ended.
Most banks were left with no alternative but to attempt to obtain waivers from their clients or, when local law explicitly prohibited this, simply close American accounts. This mechanism is unusual and tremendously effective, based entirely on the economic relevance of American financial markets (indeed, it would be reasonable to argue that very few countries in the world currently have the global economic traits necessary to pull-off FATCA-style legislation applicable to their own nationals), and it is remarkable in the sense that it was designed from the start to be implemented in practice without the need for foreign jurisdictions to comply with the exchange (the burden of negotiating terms that comply with the legislation of both nations in a reciprocal manner was left to bilateral treaties).
In this context, FATCA effectively played-out as a new form of legal instrument, one that functions regardless of borders and sovereignty, and is exclusively based on the power of markets. A country with the power to produce such legislation – laws that speak directly to foreign nationals outside local boundaries and whose enforcement is guaranteed via negative economic incentives effective immediately after publication – holds an immense responsibility towards other sovereign nations where the effects of these laws are felt.
Heeding to complaints from multinational foreign financial entities all over the world, the implementation of FATCA was delayed for a substantial amount of time (TELLO, 2014), which was meant to: (i) allow the relevant IGAs and bilateral treaties to be negotiated and implemented with all reporting jurisdictions; and (ii) give foreign financial institutions sufficient time to adjust their systems and internal procedures to ease compliance.
This 4-year interregnum, from 2010 up until 2014, provided hundreds of different reactions all over the world as local parliaments and governments 2 coped with the demands of the American Congress.
Brazilian implementation of FATCA
Among the myriad of logistical problems faced by Brazilian financial institutions regarding the implementation of FATCA, the most pressing one was regarding the risk of litigation that may declare that informing local tax authorities of confidential financial taxpayer data without prior judicial approval was contrary to Brazil’s Federal Constitution (COELHO, 2015).
This represented a very material risks for Brazilian banks, especially because FATCA implementation was well underway before the date when the matter was scheduled to be analyzed by the Supreme Federal Court of Brazil (STF).
Put shortly, Brazilian supplementary law nº 105 of 2001 effectively made it possible for banks to transmit information to Brazilian federal tax authorities without prior judicial authorization, through a specific tax information return called the “E-Financeira”. This, however, was questioned before the highest constitutional court of the country, because such an exchange, in the opinion of an important number of attorneys and scholars (COELHO, 2015), constituted a breach of bank secrecy laws (which are rooted in constitutional principles of intimacy and privacy, and therefore their breach is also a breach of constitutional rights of Brazilian taxpayers).
Indeed, the core of the discussion was whether or not it could be argued that bank secrecy was upheld in transferring information to federal tax authorities or if, and, because of the very fact that the transmitted information referred to private and sensitive data, such a transfer would contravene taxpayer rights.
In early 2016, the STF finally issued a ruling where it determined that the transit of information from banks to federal tax authorities did not constitute a breach of bank secrecy laws. This, because according to the Court tax authorities themselves also have the duty to keep this information secret – in other words, bank secrecy is not broken when banks reveal information to tax authorities because it is assumed that tax authorities, too, must keep this information secret. Hence, Brazilian tax authorities are now deemed to effectively have a duty of care regarding the secrecy of the information they obtain from the banks, paving the way for the effective implementation of Automatic Exchange of Information treaties under negotiation (GUIMARÃES, 2014).
The debate is not over, however, since the Court is yet to analyze whether that duty to keep the information secret actually extends to foreign tax authorities (and if it can be reasonably stated that it will be upheld by them).
This merits considerations for the future, and lies at the center of worldwide debates regarding automatic exchange of information: how far can one assert or trust that standards of secrecy will be kept by foreign government regarding information of Brazilian nationals (PAUL, 2013)?
Some governments have better records at keeping secrets than others. This, however, is no guarantee that information will remain protected as mandated by Brazilian constitutional law. How far does the chain of agencies upholding the duty of care go, and how important is it, today, to keep this data secret?
So far, no (publicly available) litigation has resulted from exchange of information provisions with foreign countries in Brazil. FATCA was the first instrument that allowed Brazil to perform this type of exchange, and the Brazilian Federal Revenue Service and the IRS have both confirmed that several automatic exchanges of information have already been carried out – this means that only the future will tell how the end of bank secrecy actually takes place in Brazil.
Other principles stood in the way of FATCA in Brazil and may still be cause for debate regarding its effects. The main concerns regard sovereignty and the freedom of Brazilian legislation to organize its own financial system (SCHOUERI, 2013) (FERRAZ; GUIMARÃES, 2013). Secondary concerns regard general matters of free enterprise and consumer rights, as well as possible lawsuits claiming discrimination. These may all still be the subject of constitutional litigation in the future, as the Federal Revenue Service begins collecting taxes due by Brazilians abroad and the IRS begins auditing Americans living in Brazil (even though the second case seems unlikely, due to Brazil not being a jurisdiction usually employed to evade taxes in the US).
What did Brazil get in return?
Perhaps the most intriguing part of the implementation of FATCA in Brazil are the effects as regards the possibilities that the Federal Revenue Service would have in collecting unpaid taxes due by Brazilians with undisclosed assets in the United States.
As it happened with other countries around the globe, the wording of FATCA reciprocity agreements (IGAs and treaties) was obscure and complex, setting very different standards for information coming from the US and information coming into it.
Although the case is different for each country, instruments signed by Brazil do provide a clear example of this. There were two instruments signed by Brazil: (i) the Agreement between the Government of the United States of America and the Government of the Federative Republic of Brazil for the Exchange of Information Relating to Taxes, signed in Brazilia on March 20th, 2007 (in force in May 15th, 2013); and (ii) the Agreement between the Government of the United States of America and the Government of the Federative Republic of Brazil to Improve International Tax Compliance and to Implement FATCA, signed in Brazilia on September 23rd, 2014 (in force in August 24th, 2015).
From the start, it is interesting to see the difference in speed regarding the approval of each one of the treaties above. Whereas the first agreement, largely based on the OECD TIEA model, took almost 7 years to enter into force in Brazil, the second agreement, which referred expressly to the implementation of FATCA, took little less than a year (compared with Double Taxation Conventions signed by Brazil, which may take decades to go through the internal approval process in Brazil, this particular treaty was in force in record time). This is even more relevant when one takes into consideration the fact that the 2007 treaty does not include automatic exchange of information provisions, whereas the second one does.
It is also interesting to focus on two different clauses in these treaties: persons covered, and taxes covered, to understand the extent of the exchange that was initially envisaged (TAVOLARO; SILVA, 2013) (pre-FATCA) and what ended up being approved specifically regarding automatic exchange of information.
In this sense, Articles I and II of the 2007 TIEA states the following:
“Article I: scope of the agreement
The parties shall provide assistance through exchange of information that may be relevant to the administration and enforcement of the domestic laws of the parties concerning the taxes covered by this Agreement, including information that may be relevant to the determination, assessment, enforcement or collection of tax with respect to persons subject to such taxes, or to the investigation or prosecution of criminal tax matters. […]
Article II: jurisdiction
Information shall be exchanged in accordance with this Agreement by the competent authority of the requested party without regard to whether the person to whom the information relates is, or whether the information is held by, a resident or national of a party.”
Furthermore, pursuant to Article V, regarding “definitions”:
“[…] ‘national’ means:
(a) in the case of the United States of America, any individual who is a citizen or national of the United States of America, and a person other than an individual deriving its status as such from the laws in force in the United States of America or any political subdivision thereof;
(b) in the case of the Federative Republic of Brazil, any individual possessing the Brazilian nationality and any legal entity or any other collective entity deriving its status as such from the laws in force in the Federative Republic of Brazil;
‘person’ means a natural person, a company or any other body or group of persons; […]”
From the above, one cannot see any apparent imbalance between the burden of information to be exchanged between the parties. There are no limitations regarding the scope of the assistance other than those common in similar agreements worldwide (e.g. information must be specific, and the gathering of information cannot be performed if it is contrary to local legislation). However, item (j) of paragraph 3 of Article V does reveal that the scope of the exchange was never meant to stop at the legal person, allowing its owners to shield themselves under the cloak of its articles of incorporation:
“[If specifically requested by the competent authority of the requesting party, the competent authority of the requested party shall, to the extent allowable under its domestic laws,] (j) obtain information regarding the ownership of companies, partnerships, trusts, foundations and other persons, ownership information on all such persons in an ownership chain; in the case of trusts, information on settlors, trustees and beneficiaries; and in the case of foundations, information on founders, members of the foundation council and beneficiaries. Further, this Agreement does not create an obligation on the parties to obtain or provide ownership information with respect to publicly traded companies or public collective investment funds or schemes, unless such information can be obtained without giving rise to disproportionate difficulties;”
The above means that Brazilian Tax Authorities, when specifically requesting to do so, may indeed have access to information regarding the ownership of companies, partnerships, trusts, foundations and other persons, and, pursuant to the first paragraph of Article V, they may do so regardless of whether or not they effectively need such information for their own tax purposes. However, tax authorities do have to provide reasons explaining why they believe this information is necessary (TAVOLARO; SILVA, 2013), and the requested party may deny such information request on the grounds that it is contrary to its public policy.
The above is a stern precedent regarding the extent towards which the US committed itself to exchange information with other countries, even when information regarding its own citizens was on the line. This concern, much more vocal in the US than in Brazil (PAUL, 2013) (KUETTEL, 2017), stemmed powerful resistance to the exchange itself in Congress, as well as movements sprouting in the GOP to repeal legislation that involves handing over information of American citizens to other countries (PAUL, 2013).
This mistrust is clearly portrayed in the 2014 treaty between the US and Brazil regarding FATCA. Here, both nations are not nearly as liberal as they were only one year before, when the 2007 agreement finally entered into force, and the text of the treaty seems much more one-sided than before. Great examples of this may be found in Articles I, bb) and cc); as well as in Article II and the entirety of Annex I.
Firstly, the definitions of Article I, paragraphs bb) and cc) exceptionally portray the dramatic differences in the scope of Brazilian obligations and American obligations under the Agreement:
“[…] more than $10 of interest is paid to such account in any given calendar year; or (ii) in the case of a Financial Account other than a Depository Account, the Account Holder is a resident of Brazil, including an Entity that certifies that it is resident in Brazil for tax purposes, with respect to which U.S. source income that is subject to reporting under chapter 3 of subtitle A or chapter 61 of subtitle F of the U.S. Internal Revenue Code is paid or credited.bb) The term ‘Brazilian Reportable Account’ means a Financial Account maintained by a Reporting U.S. Financial Institution if: (i) in the case of a Depository Account, the account is held by an individual resident in Brazil and
- cc) The term ‘U.S. Reportable Account’ means a Financial Account maintained by a Reporting Brazilian Financial Institution and held by one or more Specified U.S. Persons or by a Non-U.S. Entity with one or more Controlling Persons that is a Specified U.S. Person. Notwithstanding the foregoing, an account shall not be treated as a U.S. Reportable Account if such account is not identified as a U.S. Reportable Account after application of the due diligence procedures in Annex I.”
Differences between the two definitions are substantial. Firstly, it is evident that American financial institutions must only report information regarding Brazilian residents for tax purposes and are not required to perform their own due diligence procedures pursuant to Annex I of the treaty, which are exclusively devised to be complied with by reporting Brazilian financial institutions. Secondly, for Entities to qualify as Brazilian residents for tax purposes they must have some form of connection with Brazil, which does not include the fact of having Brazilian residents as partners directly or indirectly (COTORCEANU, 2015).
The full scope of information exchange obligations attributable to both parties is best illustrated when one compares the extent and the wording of paragraphs 2(a) and 2(b):
|“2. The information to be obtained and exchanged is:|
|a) In the case of Brazil with respect to each U.S. Reportable Account of each Reporting Brazilian Financial Institution:||b) In the case of the United States, with respect to each Brazilian Reportable Account of each Reporting U.S. Financial Institution:|
|(1) the name, address, and U.S. TIN of each Specified U.S. Person that is an Account Holder of such account and, in the case of a Non-U.S. Entity that, after application of the due diligence procedures set forth in Annex I, is identified as having one or more Controlling Persons that is a Specified U.S. Person, the name, address, and U.S. TIN (if any) of such entity and each such Specified U.S. Person;
(2) the account number (or functional equivalent in the absence of an account number);
(3) the name and identifying number of the Reporting Brazilian Financial Institution;
(4) the account balance or value (including, in the case of a Cash Value Insurance Contract or Annuity Contract, the Cash Value or surrender value) as of the end of the relevant calendar year or other appropriate reporting period or, if the account was closed during such year, immediately before closure;
(5) in the case of any Custodial Account:
(A) the total gross amount of interest, the total gross amount of dividends, and the total gross amount of other income generated with respect to the assets held in the account, in each case paid or credited to the account (or with respect to the account) during the calendar year or other appropriate reporting period; and
|(1) the name, address, and Brazilian CPF/CNPJ of any person that is a resident of Brazil and is an Account Holder of the account;
(2) the account number (or the functional equivalent in the absence of an account number);
(3) the name and identifying number of the Reporting U.S. Financial Institution;
(4) the gross amount of interest paid on a Depository Account;
(5) the gross amount of U.S. source dividends paid or credited to the account; and
(6) the gross amount of other U.S. source income paid or credited to the account, to the extent subject to reporting under chapter 3 of subtitle A or chapter 61 of subtitle F of the U.S. Internal Revenue Code.”
|(B) the total gross proceeds from the sale or redemption of property paid or credited to the account during the calendar year or other appropriate reporting period with respect to which the Reporting Brazilian Financial Institution acted as a custodian, broker, nominee, or otherwise as an agent for the Account Holder;
(6) in the case of any Depository Account, the total gross amount of interest paid or credited to the account during the calendar year or other appropriate reporting period; and
(7) in the case of any account not described in subparagraph 2(a)(5) or 2(a)(6) of this Article, the total gross amount paid or credited to the Account Holder with respect to the account during the calendar year or other appropriate reporting period with respect to which the Reporting Brazilian Financial Institution is the obligor or debtor, including the aggregate amount of any redemption payments made to the Account Holder during the calendar year or other appropriate reporting period.”
The above, not considering the scope of Annex I, which includes a very extensive and detailed series of due diligence procedures that have to be implemented by Brazilian financial institutions regarding US residents or companies that may be considered US residents in account of their beneficial ownership corresponding to US persons (COELHO, 2015).
The lack of balance between the obligations that are attributable to both countries is significant. So much so, that the parties felt the need to include a specific mea culpa provision where it is acknowledged that there is no reciprocity inherent to the agreement (anything less than equivalent levels of exchange is not reciprocal), and that attaining this reciprocity is a long-term objective of both parties. In this sense, paragraph 1 of Article 6 reads as follows:
“1. Reciprocity. The Government of the United States acknowledges the need to achieve equivalent levels of reciprocal automatic information exchange with Brazil. The Government of the United States is committed to further improve transparency and enhance the exchange relationship with Brazil by pursuing the adoption of regulations and advocating and supporting relevant legislation to achieve such equivalent levels of reciprocal automatic information exchange.”
Article 6, however, can hardly be called an example of a jus cogens rule present in international agreements. It is a commitment, a long-term objective by governments that will not remain in power long enough to observe it, as it turns out (the Trump era holds very shy prospects for implementation of Article 6).
FATCA and the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information
The current state of FATCA is a feat of the modern version of American big-stock diplomacy. The US managed to implement a widely unbalanced treaty with countries all over the world, largely based on the economic influence exerted on local banks in exchange for a sly commitment of future reciprocity. Even then, some political groups within America are not content with the main outcome of the initiative, which greatly impacted Americans living abroad, and failed to collect the projected amounts of taxes that where initially set forth in the Bill that passed through Congress in 2010.
These political groups, which are very similar iterations of the initial “repeal FATCA” movement of 2015, lobby in Congress to diminish even further the extent and reach of the Act. This, however, has proven to be a fruitless effort, and very unlikely to be successful in the future, especially due to the fact that the US are not a party to the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (GATCA, for short) – the extent of information exchanged with the US currently depends exclusively on FATCA and TIEAs at the bilateral level (COTORCEANU, 2015).
The question arises whether or not the US would conform with the international approach to international exchange of tax information and join GATCA eventually. The likelihood of this, in my opinion, is low. The current position of the US in terms of exchange of information, as shown above, is largely beneficial, requires little effort from the IRS and protects American nationals from having their information shared automatically with treaty partners (COTORCEANU, 2015). This falls squarely within the conservative political agenda of the current ruling party, and an overturning of that status quo would not be popular or useful in the short run.
Furthermore, several difficulties subside in practice for the US to be able to implement GATCA standards, mainly because US financial institutions do not currently report all of the required information to the IRS. As Cotorceanu puts it:
“The USA isn’t likely to enter into GATCA any time soon for at least two reasons. First, most of the data that GATCA requires to be exchanged is not currently reported to the IRS by US financial institutions. Naturally, the USA can’t promise to give data it doesn’t collect. Therefore, unless and until US law is changed to mandate GATCA-style reporting, the USA simply can’t agree to the sort of comprehensive information exchange GATCA requires. Second, there is little likelihood that US law will be amended in the near future to allow the IRS to collect the required data. The USA already gets all the data it needs on US taxpayers via FATCA, so it does not need GATCA to find its own tax evaders. Moreover, the Republicans, who control both houses of Congress, do not want to hurt the US’s banking industry. It is no secret that US banks, particularly in Miami, are awash in undeclared Latin American money. Expanding data exchange would only drive this money offshore and destroy the US’s current competitive advantage. How ironic – no, how perverse – that the USA, which has been so sanctimonious in its condemnation of Swiss banks, has become the banking secrecy jurisdiction du jour.” (COTORCEANU, 2015, p. 5)
Is the statement “FATCA is the catalyst event that triggered the current wave of global automatic exchange of information” true?
It is undeniable that FATCA is the most efficient tax information exchange mechanism implemented in modern history (IPFLING, 2015). The creativity of American lawmakers and the sheer size of the American market made it impossible for large banks not to comply. Once the large banks and their respective host countries were on board, other countries were under sizeable amounts of pressure, internationally and locally (two fronts), which meant that record-breaking treaty approval timeframes, as seen in the case of Brazil, happened all over the world.
In less than four years the IRS managed to negotiate and sign 113 agreements with sovereign nations, effectively ending bank secrecy as we know it in traditionally recalcitrant jurisdictions, most notably Switzerland, St. Kitts and Nevis, Trinidad and Tobago and the Turks and Caicos Islands, just to name a few.
However, the question remains whether the way in which this devil-may-care approach to international public policy force-fed to the world can effectively be considered the catalyst for the current scope and reach of automatic exchange of information worldwide. Here I would like to refer to an article published by Ms. Carol P. Tello, on the Bulletin for International Taxation, where she asserted:
“FATCA has evolved from unilateral US legislation to a global cooperative agreement due to the need for exchange of tax information and transparency in tax matters. Although efforts to engage in the exchange of tax information had begun prior to the enactment of FATCA, it was the threat of 30% withholding from US-source investment income to FFIs that caused government officials of other countries to accelerate discussions and planning for an automatic tax information exchange between governments.” (TELLO, 2014)
This statement, as has been discussed throughout this article, portrays the immediate events following the effective implementation of FATCA. However, it ignores the fact that GATCA provisions only entered into force after lengthy debates within the Global Forum for Tax Transparency (SCHOUERI, 2013) (COTORCEANU, 2015), and that the resulting Agreement is a work of tailored solutions and consensus-reaching suited for multiple jurisdictions to be able to peacefully and respectfully assist each other in the exchange of tax information through standardized, carefully though-out mechanisms.
As it has been discussed here, and as Ms. Tello points out in her article, “The sole purpose of FATCA is to ensure that all US direct and indirect owners of foreign financial accounts annually report the value and income of those accounts to the IRS.” The genesis of FATCA, as a political response to crisis and outrage in the context of the UBS scandal, together with the straightforward, one-sided approach that transverses that Act, make it impossible to see it as a global, cooperative agreement.
This is the reason why I oppose claims that try to accommodate FATCA as a turning point in the collective, communal effort to implement GATCA worldwide. FATCA is the equivalent of a short-term solution to a structural problem. It is effective, but it is also limited in the way on which it can be upscaled and implemented to solve that problem. FATCA, in this sense, is nothing more than palliative legislation.
One could argue that despite the nature of FATCA as a unilateral initiative, the way in which it was implemented meant that future exchange of information provisions, that rely heavily on flexible bank secrecy standards, had the hardest part of the work already done for them when FATCA charged-in and broke the mold of the international tax ancien regime that protected bank secrecy as one of the pillars of a number of jurisdictions worldwide (CHIMELLI, 2017). I agree that most of the bank secrecy strongholds throughout the world were softened with the way on which FATCA was implemented, however, it is hard to state that the same elements that FATCA faced on its implementation are those that GATCA would have to deal with in the future to achieve its objectives.
FATCA countries do not have peer-review systems regarding the implementation of this Act, they have no schedules on the key milestones leading to effective implementation, and where given no other orientations than a bulky 543-page document of procedures and rules issued by the IRS (TELLO, 2014). GATCA countries were instrumental in writing their own guidelines and agreeing to the extent of their application, they respected sovereignty and the sensibility of the information to be exchanged in their instruments and devoted special care and time (COTORCEANU, 2015) to ensure that the exchange of information was carried out in a matter that respected local legislation and obeyed to reasonable and justifiable requests for tax information.
Most relevantly, nowhere in GATCA is there a model reciprocity commitment clause that allows certain countries to obtain more than others from a bilateral relationship. GATCA is a commutable, customizable convention whose core is not a leapfrog approach to bank secrecy laws, but a pool of coordinated efforts between governments to implement a solution to tax evasion based on information deficiencies on a global stage.
Arguing, then, that the FATCA school-bully approach was the catalyst to implement GATCA is similar to sustaining that the popularization of crocket in nineteenth-century England was the catalyst that triggered the invention of football a few years after – both things are unrelated, and the statement is simply not true.
If anything, currently the role of FATCA for countries other than the US is the consecration of America as the exception jurisdiction, the Achilles’ heel of global automatic exchange of tax information, a place where funds belonging to people like Brazilian taxpayer X can be easily hidden from the rest of the world, unreportable and safe.
In this sense, FATCA will probably be the catalyst of future reform initiatives of the Global Forum on Tax Transparency, precisely to devise FATCA-like mechanisms to rein in exception jurisdictions with the combined power of the global market. In a fashion similar to the way in which non-US financial institutions were coerced into compliance via withholding obligations, US financial institutions could be similarly coerced into influencing their government to return the favor.
Is America the next tax haven for the world’s fortunes to hide from taxation in their home countries? Is the future of tax planning reserved to structures involving American holding companies, that work as blocker entities for the flow of information worldwide? Will Americans allow this any further?
As I have briefly shown above, FATCA did provide some benefits for the implementation of GATCA inasmuch as it demonstrated that overcoming bank secrecy legislation was possible. However, it can hardly be said that it constituted a catalyst for the rise of cooperative exchange of information.
FATCA also showed that the American Congress can create legislation enforceable beyond its borders, producing consequences not only reserved for American nationals, and leaping over sovereignty concerns in addressing global entities directly, in their home jurisdictions.
Also, FATCA proved that the inadvertent consequences of legislation that can delay reciprocity in the international context can reach far beyond the distortion of the planned objectives of the Law itself – it showed that hasty lawmaking can be taken advantage of, potentially harming the rest of the world in the process (the impact of America as a tax haven is yet to be measured by the countries affected).
This leads to a number of questions to be addressed as GATCA implementation takes effect all over the world, amongst which I would like to place the following for debate: (i) Should GATCA countries revisit their FATCA TIEAs to accommodate GATCA standards? (ii) Would it be preferable to maintain America as a safe harbor for information exchange, as long as that country ensures that income arising therein or passing through is taxed locally (i.e., not a case of double non-taxation)? and (iii) if GATCA countries where to implement FATCA-style withholding on American financial institutions, how could this be implemented in the context of GATCA limitations?
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- See Tello, 2014, and Ipfling, 2015, for example. ↩
- The Swiss case was particularly interesting, with authorities implementing an extensive version of FATCA that actually allowed the flow of information between local banks and the IRS without it having to pass through local authorities (type 1 IGAs). ↩