OK, so I admit, I’m conflicted. As a purist and one who was brought up in a scientific environment, I get really frustrated when I see so many half truths and misconceptions in a regulatory environment. Regulation should be first about clarity and that will lead to certainty and that’s what the industry craves, but seldom gets. That said, at the end of the day trying to make things clearer is what drives our consulting and training business. As one of my friends so beautifully put it – we are, after all, coin operated.

My friend and I, who has now gained the title of Adjunct Professor, had a long online chat last Friday about some of the misconceptions and even falsehoods surrounding much of the current tax evasion regulatory landscape. So here’s my attempt at ‘myth busting’.

First myth – US Internal Revenue Code Chapter 3 has NOT been replaced by Chapter 4. While these two US code chapters have very different policy objectives and they do have some disturbing and often confusing overlaps in procedure – one has not replaced the other. Chapter 3 is all about proper taxation of US sourced FDAP income (‘fixed determinable, annual or periodic’). The statutory rate in the US on income distributions is 30%, but that can be reduced if the recipient is entitled to a lower rate under a treaty. In chapter 3 the language is all about qualified and non qualified intermediaries (QIs and NQIs). Their customers are direct beneficial owners, other QIs and NQIs or flow through entities such as partnerships or trusts. The big message however is that Chapter 3 is still very much alive and kicking. If you receive US sourced income and you do not comply with your reporting obligations or your reports to the IRS do not reconcile to your upstream counterparty’s reports –there are published penalties that can be applied. And all that has nothing whatsoever to do with Chapter 4, otherwise known as FATCA. Chapter 4 is all about tax evasion. In chapter 4, the language is all about foreign financial institutions (FFIs), their customers can be FFIs, non financial entities (NFFEs) or individuals. Chapter 4 also has intergovernmental agreements (IGAs) instead of tax treaties.

Second myth – the US W-8 series of self certification forms is NOT mandatory either in chapter 3 and/or chapter 4, but they are helpful, and still first choice for many, for a couple of reasons. First, they are signed under penalty of perjury in the US courts. So, as long as they are properly validated, the receiving institution has no liability. Second, the W-8 can be used to grant treaty benefits because it has the required text embedded in it (which some of the others do not). You can’t grant treaty benefits for the US to a customer simply on the basis of KYC or AML. In the absence of a W-8, you would have to ask them separately for a letter claiming treaty benefits. So rather than take liability and/or have to go out to clients twice, most firms still use the W-8 or their own substitute W-8.

Third myth – the various alternatives CANNOT be used interchangeably – yet. So far, I’ve seen the British Bankers Association investor self declaration, the W-8 series, the OECD TRACE IP investor self declaration and the CRS investor self declaration. First off, as far as I’m aware only the W-8 has actually been fully agreed upon by a tax authority and is cited in settled regulation. All the others are samples which may or may not stand the test of a tax authority actually allowing a financial institution to rely on it legally or to allow that institution to be absolved of liability based on its contents. The OECD TRACE-IP investor self declaration is, to a large extent, intended to be part of a larger solution which includes a global ‘authorised intermediary’ model and the adoption of relief at source as the standard operating methodology for the world’s financial institutions. To some extent, the use of that ISD is intended to make financial institutions jobs easier and also take the burden off tax authorities for certifying their citizen’s residency via a certificate or a stamp. While its not surprising that someone has lifted the idea from a taxation of income framework and adopted it in the anti tax evasion sense, its acceptability is still unproven.

Much of this is being driven by the US FATCA regulations and which is starting to seep into the world of common reporting standards without any central authority involved. That said, if you look back at the second myth, then take a look at the CRS, TRACE and BBA forms. The BBA form could be used with respect to the US but only to document US chapter 4 status. It can’t be used to grant treaty benefits in the US because it lacks the explicit claim text that is required under the regulations. It can’t be used in the OECD countries because those countries would need to adopt the authorised intermediary model agreement described in the TRACE IP document, of which the investor self declaration is an integral part.

Fourth myth. You can’t be sued under FATCA. I continue to see inflammatory headlines and articles in the media citing lawsuits under FATCA. While I’m no lawyer, I see no provision in these regulations for lawsuits. There are penalties true, but no provision for lawsuits. In theory, if an American is reported under FATCA to the IRS (directly or indirectly) AND that person has not disclosed their foreign account, then that person would be liable to legal process for a number of things, one of which might be tax evasion – but that would occur in the US and under separate US law – not under FATCA itself which is merely an information gathering tool.

Image Credit: Emilian Robert Vicol