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Let's Talk About: US Tax

Treasury Refuses to Simplify FFI FATCA Reporting for Americans Abroad

February 23, 2017

Background

After extensive research and surveys, the American Citizens Abroad (ACA) determined something had to be done to assist Americans living and working overseas who were being turned away as customers by foreign banks and other foreign financial institutions.  In the real world, a US person abroad has terrible problems trying to manage basic living expenses if denied the opportunity to have an account at a local financial institution.  How does he pay bills, pay rent or tuition, service a mortgage, receive his salary and so on?

Various FATCA-related reasons for “locking out” American customers were enumerated by all of the institutions that participated in detailed discussion with ACA, including fear of penalties for getting things “wrong”, the costs associated with required reporting, training of the institution’s employees, record-keeping and the extreme complexity of the FATCA rules.  

In October 2013, ACA submitted a proposal to the Treasury Department and the Internal Revenue Service (IRS) that a “Same Country Exemption” (SCE) be added to the FATCA regulations and future IGAs that would alleviate this “lock-out” problem. This was followed up by meetings with the Treasury in February of 2015 and, just last year, a detailed written proposal to Robert B. Stack, Deputy Assistant Secretary for International Tax Affairs, United States Department of the Treasury.

Workings of the “Same Country Exemption”

Essentially, the SCE would do away with the FATCA reporting required of foreign financial institutions for their American clients if the accounts were in held in the “same country” where the American account holder resided. Simply put, there would be no reporting requirement for accounts held in the same country of residence.  The workings of the SCE were fairly simple. An IRS Form for the SCE could be completed by any US person electing to have the exemption provisions apply to his or her account.  If the election was made, the SCE account would be treated as a “non-US account” by the financial institution.  FATCA would not apply to such a SCE account. The account holder would give one copy of the election to the financial institution, a second copy to the IRS (as an attachment to his US tax return), and he would retain a copy.  A nice simple solution to a thorny problem!

The foreign financial institution would be relieved of all further due diligence as well as FATCA reporting to, as relevant, the Model 1 jurisdiction tax authority or to the IRS. The financial institution would not be required to look beyond the account holder’s election.  Financial institutions could choose to accept the SCE approach or, if they chose, for whatever reason, the institution could continue to lock-out US customers. Also, Americans residing in a foreign country, could choose to avail themselves of the exemption or not – the choice would be made by filing or not filing the SCE form.   

Treasury Slams the Door

In early January 2017, ACA announced the bad news that the Treasury Department refused to accept the SCE in adopting final FATCA regulations.   

In denying the request for SCE, the Treasury Department’s reasoning in the final FATCA regulations focused solely on the potential risk of US tax avoidance if such accounts were granted a reporting exemption. “The Treasury Department and the IRS have also decided that the risk of U.S. tax avoidance by a U.S. taxpayer holding an account with an [foreign financial institution] exists regardless of whether the U.S. taxpayer holds an account in his or her foreign country of residence or another foreign country.” 

The Treasury remained focused on the “risk” that US taxpayers residing in a foreign country and banking at their local bank might evade US tax through that local account.  While this is entirely possible, I do not think it likely that one would try to evade tax through such a transparent account, that is held in the individual’s name and that is being used regularly for personal banking needs such as remittance of salary and to service payment of bills or a mortgage .

ACA Will Fight On

ACA has stated it will continue to advocate for the SCE to be adopted in future FATCA regulations as it is hoped these will be revisited with the new incoming Administration. ACA plans to work as closely as possible with the new Congress and, in particular, the Americans Abroad Caucus to address the problem, recommending that a legislative proposal be enacted.  ACA will soon be posting its response to the Treasury Department’s refusal to include SCE in the final regulations.  You can check the ACA website for updates on this matter.

 

Follow me on Twitter: @VLJeker

 

 

 

by Virginia La Torre Jeker J.D.,. Find out more about Virginia La Torre Jeker J.D., here.




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