European Union Demands Reciprocity, Transparency from IRS

Since 2010, the Foreign Account Tax Compliance Act has created trouble for U.S. taxpayers living overseas. Now, a letter from the European Union’s General Secretariat of the Council has turned the tide, putting pressure on Treasury Secretary Steven Mnuchin to increase the U.S.’s reciprocity and transparency when it comes to tax compliance.

FATCA Forces EU Banks to Disclose Taxpayer IDs

The U.S. legislature passed the Foreign Account Tax Compliance Act (FATCA) in 2010 to help the Department of Treasury identify U.S. taxpayers hiding assets in overseas accounts. In addition to individual tax reporting requirements, the law also created reporting requirements for foreign banks doing business in the U.S. through bilateral intergovernmental agreements (IGAs). Those financial institutions must disclose any assets controlled by U.S. taxpayers. If the Internal Revenue Service (IRS) finds that a bank has been non-compliant with an IGA, it can impose a 30% tax withholding on payments coming out of the United States.

FATCA Creates Obstacles for U.S. Taxpayers Living Abroad

As a result of these IGAs and tax withholding rules, many European banks have begun to turn away U.S. residents, or impose additional administrative hurdles before these foreign residents can open bank accounts in their own town. This financial discrimination has become so burdensome that many expatriates consider relinquishing their U.S. citizenship altogether. However, that is a costly process, and results in a hefty Exit Tax for “covered expatriates” who:

• Have a worldwide aggregate net worth of more than $2 million;
• Owe a net annual tax liability of over $162,000 over the last 5 years; or
• Cannot show 5 years of U.S. tax compliance.

EU Demands Reciprocity and Transparency from U.S. Department of Treasury

To comply with the FATCA reporting requirements, the European Union created the Organization for Economic Cooperation and Development (OECD). The OECD has established a common reporting standard to collect and automatically exchange tax-related information. Since February 2014, the OECD has maintained a single global standard for the automatic exchange of information between tax authorities worldwide. By 2019, 105 jurisdictions committed to the common reporting standard. But the U.S. has refused to sign on to the project.

Then, on December 3, 2019, Terhi Jӓrvikare, chair of the EU Council’s High-Level Working Party on Tax Question and Director General of the Finland Tax Department, sent a letter to Steven Mnuchin, U.S. Secretary of the Treasury. The letter recognized a September 2017 IRS-published notice called the Revised Guidance Related to Obtaining and Reporting Taxpayer Identification Numbers and Dates of Birth by Financial Institutions. That policy allowed the IRS to extend leniency to financial institutions that failed to provide taxpayer identification numbers (TINs) for their account holders if they had made their best efforts to gather that information. But the policy was set to expire on January 1, 2020. While the IRS has indicated it will not automatically determine a bank has been non-compliance because a TIN is missing, that decision is now entirely at the agency’s discretion.

Jӓrvikare’s letter said that this was not enough given the burden the FATCA places on EU residents and banks to comply with U.S. tax reporting requirements. The letter said:

“We regret to note the lack of equivalent reciprocity in exchange of financial account information between the United States and EU member states.”

It called on the US to adopt the OECD’s common reporting standard, including the development of due diligence standards for financial institutions. Jӓrvikare also called for the U.S. government to further improve transparency and “enhance the exchange relationship” He concluded:

“We are hoping to find a workable solution for the EU financial institutions and the US persons living in the EU Member States, without affecting the goals of the exchange of information, and we would like to continue discussions to that end. We also believe that a solution to the above-mentioned problems could contribute positively to the quality of the information exchange on a reciprocal basis and further promote convergence with the international standard.”

Improvement in foreign financial institutions’ reporting requirements could remove burdens on U.S. taxpayers living overseas. By automating the process, the U.S. could remove obstacles for banks accepting U.S. patrons and remove the need to discriminate against their business. But the EU has issued letters like this before. Whether the U.S. government will step up to the calls for reciprocity and transparency remains to be seen.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding expatriation or the Exit Tax, contact Joe Viola to schedule a consultation.