Public Briefing on FATCA

On February 12, 2013 the OECD held a Public Briefing on FATCA at their Conference Center in the 16th district of Paris. After initially being refused entry because "priority was given to government and business," the organizers informed me Monday afternoon that they did indeed have space due to unexpected cancellations and they were looking forward to seeing me there.

It was a fascinating look at the nuts and bolts of FATCA negotiations and implementation. In addition to discussions about data exchange and the finer points of the final regulations, there were some important messages being passed between the US and the government and industry representatives in the room. I heard the words "burden relief" and "alignment" and "working with industry" many times over the course of the meeting. There seemed to be a need to assure industry that they have a say in the negotiation of the IGAs in each country and in the implementation process.

The OECD by simply hosting the event gave public support to the U.S. effort and they are clearly seeking to align their own initiatives with FATCA. For example, the OECD's position is that FATCA and TRACE are complimentary and they are looking for an alignment of the data models and data exchange formats that will be developed for both systems. That said, TRACE and FATCA have two different objectives: The first addresses source country taxation. The latter is about a "Common reporting standard for residence countries (building on FATCA IGAs; cf art 6.3 of the FATCA Model 1 IGA)" . Nonetheless, the goal is to have aligned systems.

As for the message to other governments, that was was the object of the very first U.S. presentation by Danielle Rolfes, International Tax Counsel, U.S. Treasury:

Ms. Rolfes started with a progress report on the IGAs. "Much was promised last time," she said. Since the last meeting four IGAs have been signed and they have initialed agreements with Spain, Norway and Italy. They have also initialed a Model 2 agreement with Switzerland

In answer to the question: Why is it taking so long to get these agreements signed? She had several explanations. Some of it had to do with the writing of the final regulations. Hundreds of comments on FATCA had to be taken into account and Treasury had to allocate resources to that task. In addition, the model agreements evolved as countries signed up and those evolutions had an impact as well in the writing of the final regs.

As for the IGAs, she said, most of the time needed to work out the IGAs has to do with Annexe 2 and the list of specific products exempted. It took time for Treasury to understand what those products were and to come to an agreement. She assured the attendees that this process should speed up now that the final regulations are out. Treasury tried in turn , she said, to write the final regulations to fit the vast majority of cases around the world.

As for the assertion that the delays in signing the IGA's are due to a lack of enthusiasm, well, she met that one head on. The problem is not at all about other governments being reticent about FATCA, she said, it's just a very time-consuming process. The implication was, of course, that there are other countries lined up to sign once the details are worked out. Perhaps this is true but they did not give any more information about where Treasury is in the process with those other countries who were never named.

The final regulations are out. Now what? Can they meet the deadlines? Ms. Rolfes said that she was reasonably optimistic, "if we can get your help." On the U.S. side Treasury has added more staff and is now able to allocate more resources to the IGAs.

The next speaker was Mike Danilack, Deputy Commissioner International at the IRS. He began his talk with a joke: Policy makers have great ideas, he said. We have to implement them. In addition, an IGA is not the end of the work for a country. Here are some of the things that still need to be done:

Universal schema: The electronic format for FATCA information has benefitted from the TRACE project. IRS is close to having a schema that all countries are happy with. That is for the capture of data under the Model 2 agreements. In the government to government model (Model 1) it is possible to use the same schema but governments still have to work out how they will gather information from their domestic financial institutions.

Bulk Data transmission: These transmission needs to happen on a schedule and the exchange must be both secure and efficient. Right now no system exists for governments to exchange this kind of information in bulk and on a schedule. The question of what standard/system will be used is still outstanding.

Registration: The FATCA model says an FI will make itself known to the IRS. How? Using an online web portal. IRS must also develop a unique numbering system for financial entities all around the world. the question is: Is this just for the US or do they develop a system that can be used worldwide?

All of the above will require Competent Authority government to govenrment discussions.

The floor was then given to the country representatives. These were all countries that have either already signed IGAs or are in the process of signing them:   UK, Italy, The Netherlands and Germany. The U.S. chose well - all were enthusiastic especially the UK and The Netherlands.

UK: The representative opened with a surprising comment. She said that the final regulations had a better deal than the IGA the UK signed. This, she said, needs to be reconciled.

Germany: No agreement so far. This is not due to a problem with negotiations, they had a heavy workload as well. FATCA is something new and all government departments need to have a look and there are issues that come up have to be dealt with first. But they are now in the final stages to have the agreement initialed. When? Soon. He stressed however that implementation will take time. Not sure about the timeline and and can't promise to meet the U.S. government's goals.

Italy: They are somewhere between the German and UK positions but they are now ready to initial the IGA. They had to translate the agreement into Italian. The translated text will then have to be validated with the US and their version compared to the UK one. After that they will sign and ratify. He stressed the need to work with local business community concerning implementation.

Netherlands: Very close to initialing an IGA in the coming weeks. However, they will need approval from parliament. "Looking forward to the champagne," she said when the work is done and the agreement is signed. She also mentioned that they are working closely with industry on implementation.

The last presentation was by Jesse Eggert, Associate International Tax Counsel, U.S. Treasury. He described the experience with FATCA as "An interesting ride so far,"

The statute was enacted in 2010 and in less than 3 years, he said, we've taken one of the more complicated ideas of the U.S. congress and transformed it into a set of comprehensive regulations. There are still questions. He described the goal now as getting, "The right amount of information about the right people."

Most common comments they received were about the burden of identifying customers and on the conflicts with domestic law. These have been solved, he said, in the IGAs. The U.S. can't change other country's laws but bi-lateral agreements can be used to resolve conflicts.

He then discussed some of the particulars of the final regulations and the IGAs. For our purposes, the two I thought most interesting were:

Local Bank Category: The final regs say that an institution does not have to report on residents even if they are US persons if they fall into a "local bank category" (98% of their business is local). This is designed to prevent discrimination against local account holders.

Ability to find US Accounts: There was concern in industry that there would be audits and that perfection would be required when it came to detecting US accounts. That, he said, is not the US' intention - all they expect are good procedures and processes. Errors will happen. It's OK that not all US accounts will always turn up. What they don't want to see are major systemic failures.

The final fifteen minutes were devoted to questions gathered during morning meetings and others submitted in advance by attendees. Here are two I thought were noteworthy:

The final regs seem to provide for more burden relief than the IGAs. Why?

Definitions are sometimes more generous in the final regulations. For example, new accounts treated as existing accounts in some cases.

Treasury takes the pont of view that if there is a more favorable definition in the final regulations then in the IGA, countries can choose to use the more favorable terms in the regs. Overall the final regs are a good interpretation of the IGA provisions and Ms. Rolfes said that they aren't really any conflicts. Nonetheless, between the regulations and the IGAs countries can "cherry pick" definitions provided they are not contrary to the intent of FATCA.

Question about the relationship between the IGAs and the existing tax treaties. the IGAs are built on the existing system of information exchange and double tax treaties. Can a country without these things still enter into an IGA?

Jesse Eggert said "yes.". Treasury prefers that they enter into an agreement first but if they can't, the IGA is a stand-alone agreement. Not possible to have reciprocity under such an agreement but local FI's will still be able to benefit.

So there you have it. One last comment. Only once in the entire 2.5 hours was any mention made of the impact on people (those pesky "US Persons"). Other than that, discrimination, access to basic banking services, privacy issues and so on were not discussed. Though it was a public meeting attendance was tightly controlled. When I asked the OECD contact if any other NGO's were going to be there, she replied, "Not to my knowledge." From what I could see, the overwhelming majority of the participants were industry and government representatives though I did see at least one journalist.

And that is a shame unless, of course, we limit the definition of "public" to mean bankers, tax policy makers, consulting companies and government bureaucrats. It is my own bias speaking here but I do think the discussion would have been greatly enhanced by the presence of more citizen advocacy groups. I would be very interested in knowing if any did apply and were turned away. If not, then all I can say is that they missed a great opportunity.

This blog has more notes from the conference and is worth a look.  Notes from the OECD Meeting - TRACE and FATCA.  Many thanks to Just Me for the link.