How Other Countries Are Joining the U.S.’s Fight Against Offshore Tax Evasion

For the last five years, the U.S. has waged a strong battle against offshore tax evasion. In 2010, America began its boldest crackdown with the enactment of the Foreign Account Tax Compliance Act (known widely as “FATCA”). FATCA requires foreign financial institutions (e.g., banks, investment houses, etc.) doing business in the U.S. to implement systems that identify U.S. customers and report account information to the IRS or face a debilitating 30% withholding tax on U.S. source income.

As a matter of practice, in order to expedite the information-gathering process, foreign financial institutions often don’t send U.S. account information directly to the IRS, but instead send it to the governments of the local jurisdictions where the institutions are located. To this end, the U.S. government has signed dozens of so-called intergovernmental agreements with partner countries that have agreed to digital information-exchange programs.

The Effects of FATCA

Implementing systems to identify and report account information to the U.S. government has been anything but a cakewalk for foreign financial institutions. The cost to foreign banks to comply with FATCA has been estimated at roughly $8 billion a year on a global basis. Although many banks have absorbed these costs in order to keep their U.S. customers and investments, others have begun to turn away Americans as a direct result of FATCA legislation.

U.S. citizens living abroad have felt other practical effects of FATCA. A number of prominent foreign banks, for instance, have been sending individual letters to their U.S. citizen clients requesting that they complete an IRS Form W-9 or other document in order to maintain an account at their bank. What may seem like a simple form request is in fact an initial step in a mass data-gathering process that is meant to flood the IRS with information on U.S. citizens living overseas.

The IRS, perhaps in anticipation of a FATCA spooking effect, significantly revised its tax amnesty programs several times in order to allow citizens abroad to come clean under more lenient conditions and lower penalties. The revised IRS Streamlined Procedures, for instance, have enticed tens of thousands of delinquent U.S. taxpayers over the last couple of years to become compliant with their U.S. tax-filing obligations.

Morphing Into GATCA

While the U.S. is the only major developed nation that taxes its citizens no matter where they live, it is certainly not the only country with its fair share of offshore tax evaders. Taking its cue from the U.S., the international community formalized its collective effort to combat offshore tax evasion in 2014, around four years after FATCA hit the scene.

The process began at a meeting of the Organization for Economic Cooperation and Development, where an initial group of 47 countries signed a Declaration on Automatic Exchange of Information in Tax Matters. This tentative agreement calls for participating countries to implement and adhere to a so-called “Common Reporting Standard,” also known as “Global FATCA” or “GATCA.” Dozens of nations have since hopped on the GATCA train.