FATCA in the Firing Line
September has been a bad month for FATCA. Earlier this month, Representative Mark Meadows (Republican, North Carolina) introduced Bill: H.R. 5935 in The House of Representatives. Evocatively labelled “to repeal the violation of sovereign nations’ laws and privacy matters”, H.R 5935 has only one purpose – to repeal FATCA.
What Does This Bill Mean?
The core of the legislation involves the striking of Chapter 4 of The Internal Revenue Code 1986, or FATCA as it is better known. In addition, the bill suggests amendments to Chapter 3 (QI) regulation to remove mention of FATCA, as well as ancillary changes to information reporting and penalties. The full text of the bill can be found here.
Congressman Meadows asserts the belief, held by a growing number of American citizens, that FATCA violates privacy rights. “When we look at tax laws and the disclosure of information that’s required, it is critical that we always respect the privacy rights of our citizens and remember that the Fourth Amendment is not negotiable”. Chapter 4 requires foreign financial institutions to seek out and report American accounts and assets or face a 30% withholding penalty on all US Source income. Because of this, there is a growing feeling amongst the anti-FATCA movement that this violates the Fourth Amendment to the Constitution.
This is of course not the first time that legislation has been introduced to try and repeal FATCA – Senate Amendment 621 (2015) was unsuccessful in its attempt to scupper FATCA, while Senate Bill 663 is still yet to be officially defeated. Earlier in the year, Senator Rand Paul (Republican, Kentucky) had his lawsuit challenging the validity of several IGAs thrown out by an Ohio federal judge. It remains to be seen whether history will repeat itself in the case of H.R. 5935, or if the result of the upcoming US presidential election will have any bearing on the future of FATCA.
Outside of the US, legal challenges to FATCA are gaining momentum. Earlier this month a group named Republicans Overseas Israel successfully petitioned the Israeli Supreme Court to grant a temporary injunction barring the Israeli Tax Authority from transferring American citizens’ personal information to the IRS. In addition to mounting global resistance there is a feeling within the industry that the IRS may indeed scrap FATCA and instead join the OECD Automatic Exchange of Information program (which is itself based on FATCA). These are increasingly uncertain times for what has been a controversial piece of legislation from its inception.
From a practical perspective, it is business as usual for firms affected by FATCA. However, the recent resurgence of FATCA related dissent highlights the need for organisational flexibility when it comes to international tax compliance. Firms looking to stay ahead of the curve should already be carrying out some form of impact assessment, preparing for the possibility that AEoI could take the place of FATCA.
In the event that H.R. 5935 or the various legal challenges aimed at toppling FATCA succeed, the regulatory landscape is such that something would undoubtedly come along and take its place. Whether that is AEoI remains to be seen. The consequence of this uncertainty, and of greater regulatory burden in general, is that firms have to commit more and more resource to meet their increasingly complex compliance obligations.
Image Credit: Ashton Bingham
Subject Matter Expert
Chris is a subject matter expert in US Internal Revenue Code Chapter 3 (QI) and Chapter 4 (FATCA), OECD Common Reporting Standard & Automatic Exchange of Information (CRS/AEoI) and MiFID II. Chris’ responsibilities include consultation and research, alongside the delivery of TConsult’s Interim Periodic Review (IPR) product and production of content for TConsult's marketing channels.