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Thursday, December 5, 2013

A Review of the Japan/US FATCA IGA

FATCA is an American law that requires all foreign financial institutions to turn over lists of people with connections to the U.S. (US Persons) and their financial information.  Generally, this kind of thing is illegal in most countries and a clear violation of basic privacy rights assured by many nation-state charters and constitutions. The intergovernmental agreements (IGA's) were necessary to making FATCA fly outside the U.S. because they set up a governmental framework that mitigates some (not all) of FATCA's problems AND offers at least some level of reciprocity - information exchange going in both directions and not just from the rest of the world to the United States.  

Last month I published a review of the Model I  France/US FATCA IGA.  A Flophouse reader from Japan offered to do the same for the Japan IGA which is a Model II.  Here it is and many many thanks to Inaka Nezumi for the post.


Statement of Mutual Cooperation and Understanding between the U.S. Department of the Treasury and the Authorities of Japan to Improve International Tax Compliance and to Facilitate Implementation of FATCA

English version:

Japanese version (provisional translation):

This is a Model 2 agreement, wherein Japanese financial institutions are supposed to report directly to the IRS. The Japanese government in principle does not get involved unless the US has questions or complaints about some accounts or institutions. In this regard, it appears that if the US manages to get information about a recalcitrant account holder via the Japanese government, withholding penalties will not be applied to that account. But in the general case, the Japanese government is not expected to get involved.

In return, the US agrees to keep responding to queries from Japan on tax-related matters, but does not offer anything new.

Similar to the French IGA, the determination of US personhood is left to the banks. If one has US indicia, but claims not to be a US person, one should either show a Certificate of Loss of Nationality, or else come up with a convincing explanation why one does not have or need one. Also similarly, the use of third-part service providers is permitted.

One interesting section is Section 5:

“1. Treatment of Passthru Payments and Gross Proceeds. The Participants are committed to work together, along with Partner Jurisdictions, to develop a practical and effective alternative approach to achieve the policy objectives of foreign passthru payment and gross proceeds withholding that minimizes burden.

2. Development of Common Reporting and Exchange Model. The Participants are committed to working with Partner Jurisdictions and the Organisation for Economic Co-operation and Development on adapting the terms of this Statement and of agreements between the United States and Partner Jurisdictions to a common model for automatic exchange of information, including the development of reporting and due diligence standards for financial institutions.”

This seems to indicate willingness on the US’s part to change the model of information exchange if something more mutually acceptable to other countries can be worked out.

Section 6 says that if the US agrees on an IGA with better terms with any other country, they are obligated to tell Japan about it, and Japan will automatically gain those more favorable terms as well. (I believe the UK has a similar clause.)

What is exempt under this IGA?

The following institutions/accounts are not required to report/be reported:

--Governmental and public institutions
--Pension funds (as defined by the US-Japan tax treaty)
--Small financial institutions with local client base

This is an interesting one. Basically, a financial institution which has at least 98% of its accounts held by residents of Japan (including US persons). They must not solicit accounts outside of Japan, and have a policy of closing accounts when a US person becomes a non-resident of Japan. This is the default situation for most prefectural-level banks and discount brokerages (they will only deal with residents of Japan), so this exempts all but the largest banks and brokerages. But what makes it interesting is that to maintain this exempt status, the institution must not discriminate against US persons in regard to opening accounts.(!)

--Most collective investment vehicles owned by other exempt entities.
--Employee retirement savings accounts and employee savings accounts.
--Employee insurance schemes
--Employee stock ownership plans and executive stock option plans
--Various other employee accounts and trusts
--Individual Savings Accounts, ISAs (more commonly called NISAs now), which are basically Japan’s equivalent of a Roth IRA. Contents grow tax-free, but only for 5 years, and only about $50,000 can ever be put into one. So this falls into the small-fry category, presumably.
--Specified Accounts Based on the Act on Transfer of Bonds, stocks, etc.

I assume this refers to Tokutei Koza (特定口座), which is the most common type of retail brokerage account, from which Japanese dividend and capital gains taxes are automatically deducted. Since Japanese investment tax rates are similar to comparable US tax rates, there would be no opportunity for tax evasion in these accounts, even should they become sizable. (Note: in the provisional translation, “Specified Accounts” was rendered as “Special Accounts” (Tokubetsu Koza: 特別口座), which I have never heard of before. I am assuming this was an unvetted translation mistake, and they are really talking about Tokutei Koza, but can’t find a more up-to-date, vetted translation on the web, so caveat there.)

--Corporate pension insurance, contributory group annuity insurance, group endowment insurance, group whole life insurance.

What does have to be reported under this IGA?

Basically, accounts over $50,000 at mega-banks and major brokerages (that are not NISA or Tokutei Koza). These are the only institutions that are likely to have the resources to search out and report on their US person accounts. Basically everyone else is exempted.

What does this tell me? Well, for one, I am encouraged that the US did actually restrict their attention to the big fish, and tried to minimize the impact on small fry. As far as I can tell, just about every account I own would not be required to be reported. Perhaps the US Treasury, in a rare moment of sanity, realized they did not actually want to be inundated with tons of information about accounts that would yield them nothing?

On the other hand, while this IGA seems to minimize the creation of new damage to US persons in Japan, it does nothing to alleviate pre-existing damage due to, e.g., Qualified Intermediary rules. I have faced denial of financial services as a US citizen in Japan for many years, long before FATCA came on the scene.

I also feel a bit ambivalent about the clause exempting local institutions from reporting as long as they do not discriminate against US persons. As much as I hate discrimination in general, and against “my people” to boot, the Japan-immigrant side of me feels this as a foreign imposition, particularly because the only reason for any such discrimination would have been US government policy in the first place. It would be much cleaner if the US left both me and my local bank alone.


Inaka Nezumi said...

Thanks for putting that up, Victoria.

I checked the US-France IGA, by the way, and noticed that that one also has an exemption for local financial institutions, as long as they do not deny the ability to open accounts to US persons who live in France. So this is similar to the US-Japan one.

The devil here is in the details: they have to let you open an account, but they are free to restrict what you can do in that account. Most Japanese brokerages will not allow US persons to buy US-based investments, due to Qualified Intermediary rules, which pre-date FATCA. (That's right: the US has intentionally made it difficult for US citizens abroad to buy US-based investments!) The only brokerages that do permit it are the biggest, most expensive ones.

The US-France IGA also, like the US-Japan one, gives France the benefit of any better terms the US may give anyone else.

Victoria FERAUGE said...

You are most welcom Nezumi-san and thank you again for your review. Really interesting and I really enjoyed your analysis and I think many Flophouse readers out there will feel the same.

P. Moore said...

My guess is that when all is said and done under this agreement, it will at some considerable expense, yield virtually nothing in additional tax revenue for either government.

kermitizii said...

Victoria, you should post this on IBS and Maple Sandbox. It is rather incredible. Kermit

Victoria FERAUGE said...

Indeed, I could, Kermit. That's a very good idea. Nezumi-san, would you be OK with cross-posting this to Isaac Brock?

Inaka Nezumi said...

Sure, Victoria, fine with me.