Whether through regulation or legislation #FATCA Same Country Exemption won’t work

In the beginning there was Facebook …

and from a second Facebook group:

 

Introduction: If you were to REPEAL FATCA

A previous post discussing the what exactly is meant by FATCA and the Mark Meadows “Repeal FATCA” bill, described:

FATCA is the collective effect of a number of specific amendments to the Internal Revenue Code which are designed to target both (1) Foreign Financial Institutions and (2) Those “U.S. Persons” who are their customers.

1. There are “Three Faces To FATCA” which include:

– Face 1: Legislation targeting Foreign Financial Institutions (Internal Revenue Code Chapter 4)

– Face 2: The FATCA IGAs (which for practical purposes have replaced Chapter 4)

– Face 3: Legislation targeting individuals (primarily Americans abroad who commit “Personal Finance Abroad – While Living Abroad” – Internal Revenue Code 6038D which mandates Form 8938)

2. The amendments to the Internal Revenue Code that would be necessary to reverse the sections of the Internal Revenue that created FATCA.

Legislative FATCA vs. Regulatory FATCA

The sections of the Internal Revenue Code that comprise “FATCA” are surprisingly few.

FATCA Face 1: Internal Revenue Code S. 1474(f) gives Treasury broad authority to make “FATCA regulations”.

(f) Regulations
The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of, and prevent the avoidance of, this chapter.

FATCA Face 3: Internal Revenue Code 6038D(h) gives Treasury broad authority to make regulations governing disclosure of foreign financial assets pursuant to 6038D.

(h) RegulationsThe Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance which provide appropriate exceptions from the application of this section in the case of—
(1) classes of assets identified by the Secretary, including any assets with respect to which the Secretary determines that disclosure under this section would be duplicative of other disclosures,
(2) nonresident aliens, and
(3) bona fide residents of any possession of the United States.

(The establishment of the higher Form 8938 $200,000 reporting threshold for Americans Abroad is allowed because of this broad regulatory authority.)

Most effects of FATCA are felt from Treasury Regulations and NOT from the FATCA legislation.

The effects of FATCA can be changed by (1) amending the law or (2) enacting a regulation:

Americans are governed by laws and regulations made pursuant to those laws. Therefore, Americans who wish to change the way that they are governed can attempt to change laws or attempt to change (or create) regulations. The attempts to change the “unintended” consequences of FATCA, have taken place through BOTH (1) attempting to effect change through regulation and (2) attempting to effect change by amending the laws. Whether the proposed changes are “by law” or “by regulation”, the proposed changes have been described as “FATCA Same Country Exemption”.

In general terms “FATCA Same Country Exemption” is to create conditions where:

– Foreign Financial Institutions would NOT be required to report on certain accounts of Americans abroad provided that the American is a resident of the “same country” where the Foreign Financial Institution is located;

– Americans Abroad would NOT be required to report to the IRS, on Form 8938 certain accounts (located in their “same country” of residence)

Establishing Same Country Exemption Through Regulation – The ACA Approach

The FATCA “Same Country Exemption” proposed by American Citizens Abroad was a plea to Treasury to provide relief to (a small number and narrowly defined group of) Americans abroad through regulation.

At the risk of oversimplification, the ACA FATCA Same Country Exemption proposal:

– did NOT ask for the repeal of FATCA

– benefited ONLY those Americans abroad who were U.S. tax compliant

– relieved Foreign Financial Institutions in their country of residence from having to treat the accounts as a “U.S. account”

– allowed Americans abroad to NOT treat their local bank accounts as “foreign assets” for Form 8938 reporting

– Is a U.S. citizen really an American abroad for the purposes of the Same Country Exemption? The individual’s “residency” would be determined under Internal Revenue Code 911 (the section that provides the conditions for the Foreign Earned Income Exclusion). Specifically the person would be “qualified” for FATCA Same Country Exemption if:

(d) Definitions and special rules For purposes of this section—
(1) Qualified individualThe term “qualified individual” means an individual whose tax home is in a foreign country and who is—
(A) a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or
(B) a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period.

How would it work administratively? The proposal from American Citizens Abroad

In order to claim the “same country” exemption, the individual taxpayer would be required to attach a copy of the election to his or her timely-filed Form 1040 or 1040NR. In this respect, the requirement is similar to that which applies to a taxpayer wishing to claim the foreign earned income or foreign housing exclusion.11

An individual would complete the election on a 1-page, front and back, IRS form providing the individual’s name, address, Taxpayer Identification Number, and country of residence, and listing the “same country” accounts (name and address of bank and name, number and type of account, i.e., depository, custodian, etc.). The individual would certify that this information is correct. Also, the individual would state that he or she is a resident of X foreign country and the bank(s) are licensed and regulated under the laws of X country of residence (the same country where the individual is a resident). One copy of the election would be given to the bank; a second would be attached to the individual’s federal income tax return; a third would be retained by the taxpayer. Instructions would be included on the form. Taxpayers would be warned that filing the election does not excuse them from having to report any income on the account on their tax return or from having to file an FBAR, provided in both instances they meet the applicable thresholds.

The “same country” exemption would not affect in any way the requirement to file a Form 1040 or
1040NR.

Nor would the “same country” exemption affect in any way the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).

Notice that this proposal does NOT require any consultation with the banks, suggesting the following question:

How does this provide any incentive for a bank to accept an American as a customer?* After all they are nothing but trouble. But, I digress …

Notice also that eligibility for FATCA “Same Country Exemption” is conditional on the “American Abroad” meeting the requirements in Internal Revenue Code 911 (describing the conditions for the Foreign Earned Income Exclusion).

The full text of the ACA FATCA “Same Country Exemption” regulatory proposal is here:

same-country-exemption-2015-04-06 (1)

In December of 2016, the Obama Treasury refused to exercise its regulatory authority to provide FATCA “Same Country Exemption” for Americans abroad.

Establishing Same Country Exemption Through Legislation – The Maloney Approach

On April 25, 2017 Congresswoman Maloney introduced H.R. 2136: “To amend the Internal Revenue Code of 1986 to provide an exception from certain reporting requirements with respect to the foreign accounts of individuals who live abroad.”

The purpose of the Bill is two-fold.

First, to remove the requirement that the accounts of “Americans Abroad” be treated as “U.S. accounts” for the purposes of requiring foreign banks to report on accounts under Internal Revenue Code 1471 (FATCA); and

Second, to remove the requirement that Americans Abroad report certain “foreign bank accounts” pursuant to Internal Revenue Code 6038D (Form 8938).

In other words, the Maloney Bill is to exempt certain foreign accounts held by Americans abroad from FATCA reporting.

The full text of the Bill (which is surprisingly short) is here.

BILLS-115hr2136ih

The Maloney bill appears to be an attempt to achieve the legislatively what Americans Citizens Abroad (representing a coalition of groups) attempted to achieve by regulation. The ACA (“American Citizens Abroad”) proposal – commonly referred to as FATCA “Same Country Exemption” or “Ugly American Exemption“- was ultimately rejected by the Obama Treasury which recognized that the possibility of the day-to-day accounts of Americans abroad, being used for tax evasion, was simply too great. Furthermore, the Obama administration presumption that Americans abroad are “tax cheats” was too deeply ingrained.

Section 1 – FATCA Face 1 – Exempting the Foreign Financial Institution

Three requirements must be met …

(i) The Foreign Financial Institution can elect to opt out of FATCA “Same Country Exemption”

(ii) The exemption applies ONLY to “depository accounts” which are defined in Treasury Regulation 1.1471-5 to mean:

(3)Definitions. The following definitions apply for purposes of chapter 4 –

(i)Depository account –

(A)In general. Except as otherwise provided in this paragraph (b)(3)(i), the term depository account means any account that is –

(1) A commercial, checking, savings, time, or thrift account, or an account that is evidenced by a certificate of deposit, thrift certificate, investment certificate, passbook, certificate of indebtedness, or any other instrument for placing money in the custody of an entity engaged in a banking or similar business for which such institution is obligated to give credit (regardless of whether such instrument is interest bearing or non-interest bearing), including, for example, a credit balance with respect to a credit card account issued by a credit card company that is engaged in a banking or similar business; or

(2) Any amount held by an insurance company under a guaranteed investment contract or under a similar agreement to pay or credit interest thereon or to return the amount held.

Note that “Depository accounts” are very basic bank accounts. “Custodial accounts” are NOT included in this definition.

(iii) The 911 Test Must Be Satisfied: The “American Abroad” must meet the “residence” requirements specified in Internal Revenue Code 911, which would support eligibility for the Foreign Earned Income Exclusion. The relevant part of S. 911 reads as follows:

(d) Definitions and special rules For purposes of this section—

(1) Qualified individual The term “qualified individual” means an individual whose tax home is in a foreign country and who is—

(A) a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or

(B) a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period.

Note that a person with an “abode” in the United States will NOT satisfy the “bona fide” residence test!

Who decides “whether” the 911 test has been satisfied? How is the determination made?

The mechanism for this will almost certainly have to be mandated by regulation.  Is the decision to be made by the bank? Is the decision to be made by the IRS? Is the decision to be made by he individual? The devil is in the details. This process will NOT be welcomed by Foreign Financial Institutions!

Section 2 – FATCA Face 2 – Exempting the American Abroad From Form 8938 Reporting

Once again we see eligibility conditioned on meeting the 911 test.

Q. The Maloney Bill is short. How would the Maloney Bill Work In Practice?

A. It would require more regulations (rules and forms) from U.S. Treasury.

The Internal Revenue Code gives the Secretary broad authority to make regulations to achieve the purposes of FATCA. (For example see Treasury Regulation 1.1471 which provides the definition of “depository account”.) The ACA “Same Country Exemption” proposal was attempt to encourage Treasury to provide relief for Americans Abroad by regulation.

Prognosis – Can The Maloney Bill Work?

FATCA Country Exemption, whether created through legislation (Maloney) or regulation (ACA) depends on cooperation from the Foreign Banks who have already been abused by the United States.

My prediction: The Foreign Banks will simply NOT (as is their right) participate. It is simply to risky to have “U.S. citizen” clients. In fact, it’s probably better to NOT even allow a U.S. citizen to enter the bank!

Speaking of the inevitability of regulations …

Could it be that the contents of the “American Citizens Abroad” SCE, will be enacted as “regulations” to support the Maloney bill? It wouldn’t surprise me. Stay tuned!

 

John Richardson

Appendix …

*The following is one from a series of comments discussing the Maloney bill at the Isaac Brock Society:

To me, the idea that the SCE would encourage FFIs currently not doing business with US citizens to change their stance is laughable. In the UK, about 40-50% of online brokers have blanket bans on US citizens. If the real issue was the reportability of the account, you would see at least some online brokers refusing to offer reportable accounts but offering non-reportable accounts (eg ISAs). I didn’t find any online brokers that offered non-reportable accounts when they didn’t offer reportable accounts. To me this suggests that the issue driving whether or not they service US citizen customers is not the reportability per se, but rather the risk that a single incorrectly reported account can put them on the non-compliant list.

That risk is not insignificant and for most FFIs would be devastating. Through FATCA, the US has given itself enormous power over the global financial system and the US has the “right” and the ability to inflict, at a minimum, grave financial harm if not bankruptcy if they so desire on any FFI in the world if they serve US citizen customers. FFIs are generally investing customer assets not their own and “withholding” 30% of the interest income, dividend income, proceeds of sale or redemption of principal on their customer assets will create an enormous liability vis a vis their customers that the FFI’s equity will be unable to cover or only temporarily. Furthermore, FATCA is designed to isolate any FFI deemed non-compliant by forcing all compliant FFIs to report every transaction with a non-compliant FFI. A non-compliant FFI is likely to see a) no compliant FFI willing to do business with them b) all customers with US invested assets leave them for a compliant FFI and c) an enormous liability to replace “withheld” customer income and assets. I’m also not aware of any mechanism whereby the FFI can reclaim the “withholding”. If true, then it’s a system to steal the underlying customer assets of non-compliant FFIs.

Now, which FFI having previously decided the systemic risk of having US citizen customers was too great and having seen the US treat FFIs like piggy banks to break in case of emergency, would like to place their neck in the guillotine and offer same country exception accounts by introducing new procedures to verify customer residency? Anyone? Bueller? Yeah, I didn’t think so.

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