The EU Perspective on FATCA

Efforts to ensure tax compliance from foreign investments have increased substantially over the past decade. The Foreign Account Tax Compliance Act (FATCA) is a tax law obliging US citizens around the globe to file annual returns on their foreign holdings. FATCA was formed in 2010 as part of the HIRE Act aiming transparency in the global financial market.

The Act entails foreign financial institutions to inform the US Internal Revenue Service (IRS) about financial accounts owned by US taxpayers. It seeks to eradicate tax evasion by US citizens and businesses that are financing, operating, and making taxable income abroad. Although it is not illegal to maintain an offshore account, failing to reveal the account is deemed illegal because the US taxes the incomes and holdings of its citizens worldwide.

The European Union Perspective

FATCA states that the US law can be implemented among foreign nations, including the European Union. The US body sees two options of introducing the law:

  • Through agreements between Foreign Financial Institutions (FFIs) and IRS.
  • Through international agreements.

The EU member states think differently: FATCA necessitates reporting obligations for FFIs, which are clashing with their national laws. The requirements of FATCA and FFIs do not conform to the requisites of banking secrecy and data protection.

Merely being a US citizen makes it impossible for them to avail standard banking services in the European nations they reside in. According to an investigation by the European Parliament, almost 200, 000 European citizens have been affected in their daily life by FACTA.

Therefore, a measure other than the signing agreements between FFIs and IRS is essential. Such a measure can bring an international agreement.

The European Union’s FATCA Initiative

In 2013, seventeen EU member states issued a directive expressing their intentions to launch an initiative similar to FATCA in an effort to counter illegal foreign investments. These nations are – Belgium, Denmark, Czech Republic, France, Germany, Ireland, Italy, Poland, Portugal, Slovakia, Finland, Slovenia, Romania, the UK, the Netherlands, Spain, and Sweden.

In the same year, the G8 staged a report stating the FATCA Model 1 IGA as an intelligible basis for building a standardized model for the OECD’s (Organization for Economic Co-operation and Development’s) automatic information exchange proposal.

FATCA’s Effect

The laws of FATCA have affected a large number of EU citizens, particularly the so-called ‘Accidental Americans’ and dual EU/US citizens. The act denies access to basic banking services by the EU citizens in EU. This is a breach of the Payment Accounts Directive and the Charter of Fundamental Rights of the EU.

Moreover, FATCA affects retail and commercial banks. It requires enhanced due diligence to:

  • identify customers as US nationals and foreign nationals,
  • capture FATCA attributes when onboarding new customers,
  • review e-documentation, and
  • extract indicative data of existing accounts in time.

On July 5, 2018, to a petition submitted by a collective of dual EU-US citizens, the European Parliament approved a resolution on the adverse effects of FATCA on EU citizens and the ‘Accidental Americans’.

In this resolution, the European Parliament acknowledges the complications faced by the EU-US citizens and calls on the member states to guarantee the fundamental rights of their citizens. The parliament also asserts on the significance of guaranteeing the protection of data while transmission to the IRS by the EU member states. The EU nations are encouraged to review and amend their IGAs with the US according to the Global Data Protection Regulation (GDPR).

Recent developments at the international level regarding FATCA open new dimensions for boosting the automatic exchange of information between the EU and other countries. This is improving transparency, globally.

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