FATCA and You

Part I: Where it All Began – The Anti-Harmful Tax Competition Initiative

Introduction

On March 18, 2010, United States President Barack Obama signed into law the Hiring Incentives to Restore Employment ("HIRE") Act. The statute included a section that had been originally introduced in both chambers of the United States Congress as the Foreign Account Tax Compliance Act of 2009 ("FATCA"). Along with the job creation measures included in the HIRE Act, FATCA was ready for the President's signature after the Senate agreed to the House's amendments on March 17, 2010. The following day, President Obama signed the entire package into law as the HIRE Act. This was the same President who, in proposing FATCA several months earlier, had touted the measure as "commonsense [reform to] restore balance and fairness in our tax code" designed to "crack down on illegal tax evasion, close loopholes and make it profitable for companies to create jobs in the United States." As the July 1st implementation date draws near, many commentators are viewing FATCA as a very expensive, highly invasive, costly, complicated and controversial measure that pits the United States against the rest of the world, with dire consequences to Third World nations, including member states of the Caribbean Community and Common Market ("CARICOM").

FATCA Summary

What, exactly, is FATCA? In summary, it is a United States statute that requires United States persons – that is, United States citizens and residents, whether they live within or without the United States – to report to the United States Internal Revenue Service ("IRS") their financial accounts held outside of the United States. The statute also requires foreign financial institutions (a term that includes banks) to report to the IRS certain information about their American clients. Similar to President Obama's stated goal when promoting the statute, Congress enacted the new law to make it more difficult for American taxpayers to hide from the IRS money they hold in offshore accounts and shell corporations. This, Congress believes, will enable the IRS to capture much-needed federal tax revenues.

FATCA and the OECD Initiative

The Anti-Harmful Tax Competition Initiative

Although FATCA was not enacted until 2010, the statute finds its genesis in the anti-harmful tax competition initiative launched by the Organization for Economic Cooperation and Development ("OECD") in 1998. On April 9 of that year, the OECD issued a report entitled Harmful Tax Competition: An Emerging Global Issue (hereinafter Harmful Tax Competition). The report was the result of an OECD-initiated study to examine the extent of global tax competition. Among other things, the report emphasized the negative impact of globalization and its impact on tax competition, including the increased ability of people to move money from high tax to lower tax jurisdictions. According to the report, this easy movement of capital was causing significant harm, including:

-distorting financial and, indirectly, real investment flows;

-undermining the integrity and fairness of global tax structures;

-discouraging tax compliance by all taxpayers;

-reshaping the desired level and mix of taxes and public spending;

-causing undesired shifts in part of the tax burden to less mobile tax bases such as labor, property and consumption; and

-increasing the administrative costs and compliance burdens on tax authorities and taxpayers.

Harmful Tax Competition then identified two types of harmful tax practices: (1) harmful preferential tax regimes and (2) tax havens. According to the report, countries engaged in these two harmful tax practices whenever they established tax regimes with the objective of eroding the tax bases of other countries. This erosion could take place in two ways. First, using zero or low tax incentives, these tax regimes could attract investment or savings originating in foreign countries. Second, by being neither transparent nor willing to exchange information with other countries, these zero or low tax jurisdictions could assist citizens of these other countries in avoiding their resident countries' taxes. The report then identified certain signs that signaled a country's operation of a harmful preferential tax regime: (1) the country imposed low or no taxes on income from geographically mobile financial activities; (2) the country's tax system lacked transparency – that is, the country did not adequately regulate the financial services industry and/or did not require financial disclosure by foreign investors; and (3) the country did not engage in effective exchange of information with tax authorities in the home countries of these foreign investors.

Harmful Tax Competition also identified certain factors allegedly existing – at least according to the OECD – in certain countries characterized as "tax havens." According to the OECD, these countries: (1) imposed zero or nominal taxes on relevant income from geographically mobile, financial and other service activities; (2) lacked a policy of effective exchange of information regarding their financial service providers, thereby ensuring bank and banking secrecy; (3) had established financial services regimes that lacked transparency; and (4) facilitated the establishment of foreign-owned entities without the need for a local substantive presence, or prevented those entities from having any commercial impact on the local economy. In summary, Harmful Tax Competition described tax havens as jurisdictions that allowed non-resident taxpayers to hold passive investments, book-paper profits, and hide their affairs from discovery by their resident taxing authorities.

Having identified the characteristics of these so-called harmful preferential tax regimes and tax havens, Harmful Tax Competition asserted that the governments in countries that did not fall into these camps – that is, the OECD member countries – needed to proactively counter the impact and spread of tax havens and harmful preferential tax regimes. To that end, the report listed nineteen actions these countries could and should take to counteract these negative impacts. These recommendations focused on three things: (1) encouraging and providing guidance to harmful tax jurisdictions to enact, or reform, their tax legislation and practices; (2) encouraging countries deemed to be harmful tax jurisdictions to alter treaty arrangements with OECD member countries; and (3) encouraging OECD member countries to terminate then-existing treaties with tax havens, or those countries with dependencies that were tax havens, and to not enter into treaties with such countries until they had removed all the harmful features of their tax regimes.

As a final matter, Harmful Tax Competition mandated that the OECD establish a Forum on Harmful Tax Practices, charging it with counselling jurisdictions with harmful preferential tax regimes that were willing to reform their tax systems. The report also instructed the Forum to engage in a dialogue with cooperative non-member countries to promote the recommendations contained in Harmful Tax Competition. To speed the process of dialogue, the report also established a deadline by which those jurisdictions identified as having harmful tax practices would comply with the recommendations contained in Harmful Tax Competition and thus eliminate their harmful tax systems. Of great importance, the report directed the Forum to establish a list of tax havens and countries with harmful preferential tax regimes.

The Blacklists

On June 26, 2000, the Forum released its report, announcing that it deemed thirty-five jurisdictions to be tax havens and that those jurisdictions would be included on an upcoming List of Tax Havens. In a high-handed move, the Forum demanded that those thirty-five jurisdictions make adjustments to their respective fiscal policies to conform to the recommendations proposed in Harmful Tax Competition. The Forum warned that any tax haven jurisdiction that failed to comply would face severe consequences: the OECD would deem such jurisdiction "uncooperative," and would subject it to defensive measures by the OECD member countries. These defensive measure included: (1) disallowing deductions, exemptions, credits, or other allowances related to transactions with these jurisdictions, and (2) requiring comprehensive reporting rules for transactions involving these jurisdictions, supported by substantial penalties for inaccurate reporting or non-reporting of such transactions. Once included on the list, jurisdictions could have themselves removed only by agreeing to co-operate with the OECD initiative by signing either advance commitment letters (that is, pre-June 2000) or making scheduled commitments (post-June 2000) agreeing to implement measures reforming their tax policies in a manner satisfactory to the OECD.

Faced with the might and power of the OECD, the listed jurisdictions sought ways to comply. Many of them had recently become involved in the offshore financial services industry. They now saw the OECD's initiative as being harmful to the growth of the industry. While many remained silent, Ronald Sanders, then-Antiguan Senior Ambassador with Ministerial Rank and High Commissioner to the United Kingdom, described Harmful Tax Competition as:an attempt [by the OECD] to force all countries over which there is some measure of coercive influence and control to co-operate in the implementation and enforcement of a standardized system of taxation even though such a system may effectively place small countries at a severe disadvantage in building or creating financial services sectors.

Ambassador Sanders opined that this "attack on the movement of money from OECD countries into countries such as those in the Caribbean [was] extremely troubling." He called for "the most concerted action by the affected countries in resisting it."

Two years later, after the OECD issued its List of Tax Havens (which included several CARICOM countries), Ambassador Sanders opined that the CARICOM countries included on the list were "victims of the worst form of bullying by big, strong and powerful nations that the world has witnessed since the 19th Century." Sanders went on to describe the OECD anti-harmful tax competition initiative as "nothing less than a determined attempt [by the OECD] to bend other countries to its will, . . . a form of neo-colonialism in which the OECD is attempting to dictate the tax economic systems and structures of other nations for the benefit of the OECD's member states."

Caribbean bankers joined Ambassador Sanders in his criticism of the OECD initiative. Even before the OECD issued its List of Tax Havens in June 2000, a group of these bankers took a pre-emptive strike at the list, calling it an attempt to punish those regions that had made their tax rates more attractive. Speaking for the group of bankers, Petty Ettinger, then-vice-president of Barbados-based Bayshore Bank, told a Miami Business Conference that in undertaking its tax initiatives, the OECD was "trying to act as global tax police." Moreover, she stated, the OECD had apparently confused the concepts of tax evasion and tax avoidance, and was perceiving tax avoidance "as 'tax leakage' from holes in the dike."

Marion Williams, then-governor of the Central Bank of Barbados, and Julian Francis, then-governor of the Central Bank of the Bahamas, also criticized the OECD initiative. Williams argued that the OECD's decision to "blacklist" so-called uncooperative offshore financial centers was illegitimate and constituted an abuse of the organization's power. Francis argued that the OCED's initiative – aimed at "putting serious criminals out of business by attacking the financial jugular of small developing countries – [was] counterproductive."

After the OECD issued its List of Tax Havens in June 2000, the bankers maintained their criticism. Neville Nicholls, then-president of the Caribbean Development Bank (CDB), accused the OECD of using "shameless self-serving tactics" to blacklist small countries as tax havens so that the organization's wealthy members could protect their own financial sectors. Nicholls opined that the OECD's effort to stop what it labeled "harmful tax practices" was only an attempt on the organization's part to recapture business lost to non-member organizations. Nicholls went on to accuse the OECD of "using its fight against money laundering as an excuse to alter Caribbean nations' competitive low-tax regimes to the benefit of banks in richer countries."

Notwithstanding the verbal protests of Ambassador Sanders and the Caribbean bankers, elected government officials throughout CARICOM wilted. Only Prime Minister Denzil Douglas of St. Kitts-Nevis and then-Prime Minister Owen Arthur of Barbados loudly protested the OECD's actions. Other CARICOM leaders were silent. Perhaps they just did not understand what was at stake. Or maybe they wanted to appease their electorates. After all, many members of the Caribbean public supported the OECD's actions! Not having been educated by their leaders on the true nature of the fight with the OECD, the masses believed the OECD's mirage that its efforts to halt the flight of capital from high-tax to low-tax jurisdictions was really a noble effort to arrest worldwide money laundering. That is not surprising. After all, the OECD followed the issuance of its List of Tax Havens with the issuance of other "blacklists," including one issued on June 22, 2000, that identified fifteen jurisdictions as being uncooperative in the global fight against money laundering. This latter list included five CARICOM members: the Bahamas, Cayman Islands, Dominica, St. Kitts and Nevis, and St. Vincent and the Grenadines. Having their countries blacklisted by this seemingly prestigious international organization was frightening to the taxpayers. They now wanted only one thing from their leaders: do all in their power to remove their beloved islands from the blacklists.

In such an environment, CARICOM leaders were impotent, unable to rise to the occasion and rescue their nations from the wiles of the OECD. Every CARICOM country executed the necessary documents to make them compliant with the OECD's anti-harmful tax competition initiative. When the OECD issued its List of Uncooperative Tax Havens on April 18, 2002, no CARICOM member was listed. Instead, the seven listed jurisdictions were small, largely unknown countries: Andorra, Principality of Liechtenstein, Liberia, Principality of Monaco, Republic of the Marshall Islands, Republic of Nauru, and Republic of Vanuatu.

Conclusion

The capitulation by CARICOM and other Third World nations satisfied the OECD. For twelve years now, the world's small and developing nations have surrendered their tax and economic policy sovereignty and followed the dictates of the OECD. Opening an account at any bank in Roseau is a nightmare for any resident of the United States, requiring much documentation, including notarized statements attesting to the depositor's honesty and good standing. Alas, this has not satisfied members of the United States Congress. Still eager to increase its wealth at the expense of the good name and people of Third World nations, the United States now requires all nations to bow to its demands as expressed in the Foreign Account Tax Compliance Act. Part II of this series will discuss the persistent efforts of US Congressmen to enact FATCA.

By Dr. Vaughn E. James

[Dr. Vaughn E. James is a former Calypso and Roadmarch King of Dominica, and former President of the Dominica Calypso Association. A member of the Dominica Calypso Music Hall of Fame, he is currently an Endowed Professor (The Judge Robert H. Bean Professor of Law) at Texas Tech University School of Law in Lubbock, Texas. He is the former Director of the Texas Tech University Tax Clinic, and the Incoming Director of the Texas Tech University Master of Laws Program. He teaches International Taxation, Federal Income Taxation, Federal Estate and Gift Taxation, Elder Law and Law and Religion.]