FATCA provides cover for a European FATCA

07 Oct, 2013

Only FATCA (Foreign Account Tax Compliance Act) can rival AIFMD (Alternative Investment Fund Managers Directive) as the least favourite abbreviation of COOs. Yet FATCA has performed a remarkably useful service for tax authorities all over the world, by accelerating the adoption of similar proposals elsewhere while providing useful cover for these efforts to copy the American example. The unappetising truth is that the automatic exchange of information about non-resident taxpayers by tax authorities in different jurisdictions – as opposed to occasional requests, when tax evasion is suspected - is now established as an international norm.

The planned extension of the European Union (EU) Savings Directive, first agreed as long ago as 2003, is a contemporary case in point. The original Directive was actually the first case of multi-lateral co-operation in the exchange of tax information. The exchanges were made on a request only basis, but it nevertheless broke the longstanding convention that tax data was shared with another government only by the terms of a bi-lateral double tax treaty. New measures mean that an EU member state can no longer refuse a request for data.

The EU Administrative Cooperation Directive on the Recovery of Tax Claims of 2012 and the revised Administrative Cooperation Directive of 2011, both of which came into force in January this year, will from 2015 permit the automatic exchange of tax information about salaries, directors’ fees, life assurance income, pensions and rents between EU member-states.  Worse, the European Council in May this year proposed extending that automatic exchange of tax information to cover dividend payments, capital gains, any other income derived from financial assets, and payments made to or received from bank accounts.

The European authorities are still exercised by the ineffectiveness of the Savings Directive, which they consider ineffective as taxing financial flow through offshore jurisdictions and innovative financial instruments. The automatic exchange of information under the Directive, first proposed as long ago as 2008, was long obstructed by the two EU member-states that had most to lose from the automatic exchange of tax information – namely, Austria and Luxembourg – but both have now accepted automatic exchange in principle, provided Switzerland, Liechtenstein, Monaco, Andorra and San Marino do not attempt to take unfair competitive advantage.

Switzerland has already accepted in principle the idea of sharing tax information with EU member-states, and the proposed trade-off for automatic exchange of tax data - abolition of withholding taxes between states – is not proving as unpopular as it might with cash-strapped governments. So it looks as if the EU member-states and their richest neighbour may even get to the FATCA stage – namely, the automatic exchange of tax information between governments – before FACTA itself, which was delayed again to July 2014. Indeed, the tax authorities of France, Germany, Italy, Spain and the United Kingdom have already agreed to establish a “pilot multi-lateral exchange facility” to exchange data in the fashion demanded by FATCA.

In short, by the beginning of 2015 tax authorities throughout the EU, Switzerland and the United States are likely to be swapping detailed tax information about their citizens. This is happening thanks to an unfortunate confluence of political necessity (most governments are bankrupt), politically useful resentment (banks and multinationals have become useful scapegoats for politicians) and politically naïve economics (that tax collection should be efficient).  Both investors and principals in the fund management industry are getting caught up in the consequences, since they will be the sources of information as well as the targets of the measures. Tax is becoming another compliance nightmare, in which the reputational downside is unlimited. 

Dominic Hobson

FATCAEUSwitzerlandAIFMDSavings Directive