Since I did not see much in the way of in depth reporting on the FATCA public hearings of May 15th, I searched out the written testimony and sat down for a read this weekend. Thought I would share a few observations, (not an exhaustive analysis) and the provide the entire document for your own reading pleasure, so you can draw your own conclusions.
After all the opening patronizing comments about supporting the goals of FATCA and thanking the IRS for “allowing” them to comment, the speakers got down to some pretty serious criticism and concerns about FATCA rules which are currently in a 388 page draft form.
Sadly, there was very little outright push back at all these extraterritorial compliance requirements, other than to say, by some, “we can’t do that!” Maybe those that stayed home are sending a message with their absence!
The strongest statements of what was wrong with FATCA, in my opinion came from Japan, Sweden and BlackRock.
The BIGGEST issue, that almost all expressed concern about was implementation delays. There is way too much uncertainty to spend a lot of money and IT time on something still unworkable and not final. The general consensus was that it would take 18-24 months from the point of finalization to implementation, if it was doable at all.
Here are a few selected classic quotes.
The Bank of New York Mellon, said “We support the goal of evasion of U.S. taxes ,ah, stopping the evasion of U.S.taxes –(Laughter) Sorry”
The Canada Banking Association said, “Financial institutions cannot be expected to start building systems until the regulations and the FFI agreements are finalized.”
The head of tax at TD Bank Group said “We cannot even begin implementation in earnest until the regulations, intergovernmental agreements, and relevant forms are finalized.”
Brazil said, “Regarding the deadlines, we think that after the rules are established for pass-though, we would need at least 5 years to be able to put operational systems in place.”
Sweden said, “The definition of financial accounts is unclear, and we have tested that on our lawyers, that they read the text of the regs and no one understands it.” (Laughter)
Also, in my reading of the comments, I was struck by the general pessimism about the rules and how unworkable they are. Many concerns about the unintended consequences and systemic risks to the international financial markets were expressed.
Certainly the KYC (know your client) and AML (Anti Money Laundering) regulations were mentioned by many speakers as a better method to be used in place of the obnoxious and unworkable documentation requirements of FATCA. There was much pleading for using Risk assessment models as a better way of assessing who needed to comply. There were also many pleas for this or that entity or group to be “deemed compliant” and lots of exemptions requested.
For the readers interest, here is a non exhaustive list of comments I noted and jotted down.
-Rules unfairly favor U.S. banks over FFIs
-Need a risk based approach
-Due diligence inconsistent with AML/KYC
-Conflicts with local and foreign law
-unprecedented extraterritorial reach
-Documentation renewal and records very expensive, eliminates the convenience of opening an online account.
-Entity documentation should be made considerably less burdensome
-superannuation and retirement funds must be deemed compliant
-has some degree of inconsistency and unreasonableness
-Implementation should be delayed ~18-24 months after final regs.
-Treasury has not considered FATCA’s impact on investors, capital markets, and penalizes U.S. funds
-Extremely unreasonable and unfair that punitive withholding tax would be imposed
-Regarding Mutual funds- one-size-fits-all approach doesn’t work in practice
– FFIs will need to quarantine some branches/affiliates in countries where compliance cannot be achieved.
-Regs a step backward, unnecessary impediments, a very negative effect on U.S.
competitiveness, U.S. jobs, and U.S. capital markets.
-The definition of a “U.S. person” very complicated for IT support criteria.
-It’s another inconsistent and unreasonable aspect of FATCA.
-Impossible for financial institutions to meet required target dates
-Certain “so called” Entities are not really entities so need exceptions
-Unnecessary and costly duplication of effort and must be modified in the final regulations
– and many many more…
Thinking about what I read, you have to wonder what is the likelihood that the IRS is going to resolve all those problems in the short time left before the final Regs are due this fall? I see that this story is out tonight on Reuters saying that the U.S. aims at 5 EU tax evasion deals this month. I don’t see how they do it without just ignoring a lot of the issues presented in these hearings.
Also these deals depend on DATCA, and it is not done. Regulations have not yet been issued. As Isaac Brock readers know, the U.S. reciprocity promise is in the DATCA details, and I understand there is growing Congressional opposition to this domestic version of FATCA that is supposed to make these FATCA partnerships work. If DATCA gets stopped either by legislative or legal means, I think that puts a big wrench in the IRS 5 deal wringer. There is a recent Miami Herald story entitled “New IRS rule scares foreign depositors.” which you might want to read. I don’t think the opposition to DATCA is going away soon. I know the IRS has yet to issue the rules, and there will assumedly be a comment period and hearings. I would think that will get more press than the FATCA hearings, so this DATCA battle isn’t over until the FATCA Lady sings.
Another consideration. If these “EU deals” happen while they are still finalizing FATCA rules, it actually might complicate FATCA for a lot of bigger FFIs with groups operating across Partner and non partner countries. There will be different rules for the same group. That will cause real headaches, as there will be a myriad of effective dates across a single group. Additionally different governments will have different procedures across the same group, and that make things more complex which is the opposite of “lightening the load.” which some analysts insist FATCA partnerships will do.
It seems to me, given the short time frames before final regulations are due in the Fall, the IRS will have to make some key decisions shortly. Either they will they just press ahead without due consideration of the testimony I read, and this was all just kabuki theater, or they will have to announce some delays soon so FFIs know what to expect.
What was missing in those hearings, and maybe that is just what happens at all such Public hearings is that there were no questions asked by the IRS and Treasury group who were there to just to listen, I guess. Not sure what, if anything, they actually heard and took on board. Maybe that happens later in back rooms and side conversations, but I would of thought that for some of the more technical points being made, someone would have at least asked for a clarification.
Finally, I have put up links to 5 of the testimonies which were of particular interest to the Isaac Brock Society readers in Canada and put them in the appropriate thread dealing with the subject.
If someone wants to read the entire testimony, below is a copy for your reference.
If you need it, here is a link to FATCA definitions