In a letter to United States Treasury Secretary Steven Mnuchin, the European Council has expressed concern at the lack of action by the US Government to alleviate the compliance burdens of EU nationals and financial institutions with regards to the US Foreign Account Tax Compliance Act.
FATCA, which was enacted by the US Congress in 2010 and took effect on July 1, 2014, is intended to ensure that the IRS obtains information on financial accounts held at FFIs by US persons. Failure by an FFI to disclose information on their US clients will result in a requirement to withhold 30 percent tax on payments of US-sourced income.
In addition, US taxpayers holding financial assets outside the United States meeting certain monetary thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets, with those failing to comply facing potentially heavy financial penalties.
Of particular concern to the EU is the situation of “Accidental Americans,” those who acquired US citizenship by virtue of being born in the US (but who have lived most of their lives in the EU) or having a parent who is a US citizen. As the US is almost unique in basing taxation on citizenship rather than residency, the letter notes that “a considerable number of EU residents have realized that they qualify as US persons under US national law.”
“We are receiving an increasing amount of signals that this group is confronted with administrative hurdles. An example is the filing of a US tax return as a foreign resident, whilst in the majority of cases no US tax is due. A part of this group is considering to relinquish their US citizenship, but the procedure is lengthy, costly, and complex. The renunciation fee alone amounts to USD2,350 on top of which the costs of filing tax returns and any tax liabilities would be added,” states the letter by the Chair of the EU Council High Level Working Party on tax matters, dated December 3, 2019, and released on December 11.
While the letter welcomed September’s announcement by the IRS of relief procedures for certain former citizens, it said that the measures do not go far enough to alleviate compliance burdens.
These procedures will enable certain individuals who relinquished their US citizenship to come into compliance with their US tax and filing obligations and receive relief for back taxes. However, they will apply only to individuals who have not filed US tax returns as US citizens or residents, owe a limited amount of back taxes to the United States, and have net assets of less than USD2m.
Eligible individuals wishing to use these relief procedures are required to file outstanding US tax returns, including all required schedules and information returns, for the five years preceding their year of expatriation. Provided that the taxpayer’s tax liability does not exceed a total of USD25,000 for the six years in question, the taxpayer is relieved from paying US taxes.
According to the Council’s letter, to be more effective, the relief procedures should also lower the cost of renunciation of US citizenship, simplify the filing process, and exempt more taxpayers from the need to go through the procedure.
Another FATCA-related issue of concern to the EU is the upcoming expiry of Taxpayer Identification Number relief for financial institutions on January 1, 2020. Under FATCA, FFIs are required to provide TINs with the information they report to the tax authorities under a Model 1 FATCA Intergovernmental Agreement. However, FFIs are unable to provide TINs with regards to many “Accidental Americans,” potentially bringing them into non-compliance with FATCA.
In 2017, the IRS issued Notice 2017-46, which provides that FFIs will not be considered non-compliant with obligations under a Model 1 IGA solely as a result of a failure to report US TINs associated with the FFI’s US reportable accounts until January 1, 2020. The IRS recently added to its list of FATCA FAQs to inform FFIs that from 2020 it will not automatically consider the absence of a TIN in a FATCA report as a matter of non-compliance. However, the Council’s letter says that the wording of the FAQ is non-binding, and allows the IRS much discretion in its interpretation.
“The financial institutions are concerned over the possibility that the IRS will determine that there is significant non-compliance despite the fact that the financial institution has done all in its best efforts to obtain the US TIN,” the letter states.
Finally, the EU highlights the ongoing lack of equivalent reciprocity in the exchange of financial account information between the US and EU member states. In particular, it notes that the US has failed to sign up to the OECD’s Common Reporting Standard, the single global standard for the automatic exchange of information between tax authorities worldwide.
“We regret to note that the United States is the only major financial center that has not committed to the Common Reporting Standard,” the letter states, adding that the EU “would like to be informed about the actions taken by the Government of the United States in order to further improve transparency and enhance the exchange relationship.”