In a U.S. District Court (Southern District of Ohio) opinion released on September 29, 2015, the U.S. District Court held that certain plaintiffs lacked standing to enjoin the U.S. government from enforcing FATCA, IGAs, and the FBAR. The following is an excerpt from the case that provides an overview of FATCA.
Congress passed the Foreign Accounts Tax Compliance Act (FATCA) in 2010 to improve compliance with tax laws by U.S. taxpayers holding foreign accounts. FATCA accomplishes this through two forms of reporting: (1) by foreign financial institutions (FFIs) about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest, 26 U.S.C. §1471; and, (2) by U.S. taxpayers about their interests in certain foreign financial accounts and offshore assets. 26 U.S.C. §6038D.
President Obama signed FATCA into law on March 18, 2010. Senator Carl Levin, a co-sponsor of the FATCA legislation, declared that “offshore tax abuses [targeted by FATCA] cost the federal treasury an estimated $100 billion in lost tax revenues annually” * * * FATCA became law as the IRS began its Offshore Voluntary Disclosure Program (OVDP), which since 2009 has allowed U.S. taxpayers with undisclosed overseas assets to disclose them and pay reduced penalties. By 2014, the OVDP collected $6.5 billion through voluntary disclosures from 45,000 participants. * * * The success of the voluntary program has likely been enhanced by the existence of FATCA.
2. Foreign Financial Institution Reporting Under FATCA
Foreign Financial Institution reporting encourages FFIs to disclose information on U.S. taxpayer accounts. If the FFI does not, then a 30% withholding tax may apply to U.S.-sourced payments to the non-reporting FFI. A 30% withholding tax may also apply to FFI account holders who refuse to identify themselves as U.S. taxpayers.
In the case of any withholdable payment to a foreign financial institution which does not meet the requirements of subsection (b) [specifying reporting criteria], the withholding agent with respect to such payment shall deduct and withhold from such payment a tax equal to 30 percent of the amount of such payment.
26 U.S.C. §1471(a).
Section 1471(b)(1) then provides that, “[t]he requirements of this subsection are met with respect to any foreign financial institution if an agreement is in effect between such institution and the Secretary [of the Treasury] under which such institution agrees” to make certain information disclosures and “to deduct and withhold a tax equal to 30 percent of … [a]ny [pass-through] payment which is made by such institution to a recalcitrant account holder or another foreign financial institution which does not meet the requirements of this subsection[.]” §1471(b)(1)(D)(i); see also §1471(d)(7) (defining “pass[-through] payment”). A “recalcitrant account holder” is one who “[f]ails to comply with reasonable requests for information” that is either information an FFI needs to determine if the account is a U.S. account (§1471(b)(1)(A)) or basic information like the account holder’s name, address, and taxpayer identification number (§1471(c)(1)(A)). Section 1471(c)(1) specifies the “information required to be reported on U.S. accounts,” including “account balance or value.” §1471(c)(1)(C). * * *
Under §1471(b)(2), “Financial Institutions Deemed to Meet Requirements in Certain Cases,” an FFI “may be treated by the Secretary as meeting the requirements of this subsection if … such institution is a member of a class of institutions with respect to which the Secretary has determined that the application of this section is not necessary to carry out the purposes of this section.” That means that an FFI that is treated this way is not subject to the reporting criteria in §1471(b)(1). The Secretary can statutorily exempt FFIs from “attempt[ing] to obtain a valid and effective waiver” of foreign nondisclosure laws from each account holder and can exempt FFIs from “close such account … if a waiver … is not obtained from each such holder within a reasonable period of time.” §1471(b)(1)(F). [footnote omitted] The Secretary’s exemption of an FFI under §1471(b)(2) also means that the FFI no longer has to make the report described in §1471(c)(1) because that report is based on “[t]he agreement described in subsection (b)” that an FFI that the Secretary has exempted does not need to have in place to avoid withholding. Furthermore, the FATCA statute provides that, “[t]he Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of, and prevent the avoidance of, this chapter,” i.e., §§1471-74. 26 U.S.C. §1474(f). The Government asserts that the intergovernmental agreements (IGAs) constitute the Secretary's exercise of the statutory discretion afforded by §§1471(b)(2) and 1474(f).
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B. The Canadian, Czech, Israeli, and Swiss Intergovernmental Agreements
Once FATCA became law, the Government began requiring coordination with FFIs and foreign governments. To facilitate FATCA implementation, the United States has concluded over 70 intergovernmental agreements (IGAs) with foreign governments addressing the exchange of tax information. * * *
The Canadian, Czech and Israeli IGAs are similar because they are all “Model 1” IGAs, whereas the Swiss IGA is a “Model 2” IGA. The key distinction is that under Model 1 IGAs, foreign governments agree to collect their FFIs’ U.S. account information and to send it to the IRS, whereas under Model 2 IGAs, foreign governments agree to modify their laws to the extent necessary to enable their FFIs to report their U.S. account information directly to the IRS. All four IGAs, in their preambulatory clauses, recognize the partner governments’ mutual “desire to conclude an agreement to improve international tax compliance” or, in the case of Switzerland, a “desire to conclude an agreement to improve their cooperation in combating international tax evasion.” * * *