FATCA: A Matter of Sovereignty?


FATCA US Treasury Building

The Lebanese Banking Sector and FATCA

Foreign Account Tax Compliance Act (FATCA) is a federal law that requires US persons to report their financial accounts held outside of the United States and requires foreign financial institutions (FFI) to report to the Internal Revenue Service (IRS) information about their US clients.

Congress enacted FATCA to make it more difficult for US taxpayers to conceal assets held in offshore accounts and shell corporations, and thus to recoup federal tax revenues. It was promulgated to combat tax evasion by US persons.

Initially, FATCA was a portion of the “Hiring Incentives Restore Employment” (HIRE) Act which is a law issued in USA in an effort to reduce the persistently high unemployment rate that the USA has witnessed and to encourage economic growth.

One of the main reasons FATCA was deemed necessary by US legislators being that Americans living abroad must still pay US income tax. Even if the income is generated in a foreign state and has no direct connection with the US, income tax must still be paid to the US government.

What does FATCA state and what are the penalties imposed on its violators? How do the Lebanese administrations and institutions deal with such a law? Does FATCA violate Lebanese national sovereignty?

Table of Contents

I. FATCA: Provisions and Jurisdiction

1) Provisions

2) What Constitutes a US Person?

3) International Banking Systems Similar to FATCA

II. Procedures for Implementation

1) Enforcing Compliance with Local Laws

How is Lebanon Coping with FATCA?

2) Enforcing Information Exchange

Bibliography

I. FATCA: Provisions and Jurisdiction

1) Provisions

FATCA has three main provisions.

It requires FFIs such as banks to enter into an agreement with the IRS. This agreement consists of the foreign institution identifying their US personal account holders (clients) and to then disclose the account holders’ names, identification numbers, addresses, and the transactions of most types of accounts. However, some types of accounts, notably retirement savings, may be excluded from reporting on a state by state basis.

FATCA additionally imposes a 30% withholding tax on foreign entities that refuse to disclose the identities of their US clients. This means that non-compliant FFIs must pay the IRS a 30% cut on any payments made to them from a US source. Lebanese banks are much like any other FFI worldwide – they are expected to comply with FATCA regulations or else be held accountable by the US government.

FATCA also requires US persons who own foreign accounts or other specified financial assets to report their assets to the IRS. These US persons must report them to the IRS along with the tax return if the accounts are generally worth more than $50,000. If a US person is caught understating their income they may find themselves to be fined up to 40% of their actual yearly wages. Understatements of more than 25% of gross income are subject to an extended statute of limitations period reaching up to six years. FATCA regulates that taxpayers must also report financial assets that are not held in a custodial account, i.e. physical stock or bond certificates.

Lebanon Law Review | Al Capone FATCA IRS
At the end of the day, mafioso Al Capone landed in jail not because of his notorious crimes but because the IRS convicted him of tax evasion. He was sentenced to 11 years.

2) What Constitutes a US Person?

One is considered a US person if he/she:

  1. Is a US resident (green card holder).
  2. Is a US citizen.
  3. Was born in the US
  4. Has a US postal address.
  5. Has a current US telephone number.
  6. Has standing instructions to pay amounts from a foreign (meaning non-US) account to an account maintained in the United States.
  7. Has a current power of attorney or signatory authority granted to a person with a US address.
  8. A US “in-care-of” or “hold mail” address that is the sole address with respect to the account holder.
  9. In addition to any non-US person who shares a joint account with a US person or otherwise allows a US person to have signatory authority on their account. In other words, the joint account in which one of its holders is a US-person is considered to belong to the latter.
  10. Additionally, any business or not-for-profit organization that allows a US person to have signatory authority on a financial account.

3) International Banking Systems Similar to FATCA

The Organization for Economic Cooperation and Development (OECD) has formed an initiative for global tax transparency known as the Common Reporting Standard (CRS) that is much in the same vein as FATCA. The CRS is a broad reporting system that draws extensively on the intergovernmental approach to the implementation of FATCA. In other words, CRS is a global version of FATCA and is sometimes referred to as “Global FATCA” or “GATCA” for short.

Similar to FATCA, the CRS requires all financial institutions resident in a participating jurisdiction to identify and report any reportable accounts (typically belonging to persons whose tax resident is in a CRS participating jurisdiction). As of May 2018, over 100 jurisdictions have signed the CRS agreement including Lebanon

Under the CRS, FIs are required to determine where the client is a “tax resident” (this will usually be where he is liable to pay income or corporate taxes).

If the latter’s tax resident is outside the country where he banks then FIs may be required to provide details, including information relating to his accounts, to the national tax authority in the country where the account is held.

With regard to banking secrecy in light of the requirements of “GATCA”, Lebanon had approved procedures, in a way that banking secrecy no longer stands in front of the inquiry from external parties. Therefore it became known that the client cannot henceforth hide behind banking secrecy law, which was originally issued to attract clean money not to protect dirty money.

The United States of America is an economic behemoth. Can you spot Lebanon?

BDL issued decision No. 12309 of August 5, 2016 regarding the exchange covered by bank secrecy. This was in line with tax information according to international standards.  This decision requires banks and FIs to take appropriate administrative and technical measures to provide the special investigation committee the information requested by the relevant foreign authorities about the accounts of some residents in their countries. This is accomplished through the Lebanese Ministry of Finance. That is applied within the framework of the tax-information exchange in accordance with the recommendations of the Global Forum and OECD.

In addition to all this, nothing prevents the Lebanese state from responding to a request for tax-information submitted by a foreign country based on provisions of the double taxation treaty signed between the Lebanese state and another foreign country like France.

By virtue of the decision issued by the Council of State No 233/ 2017, the council considers that it is more than sufficient (in order to transmit tax information pertaining to residents of the other contracting party in the assumption of a DTT (Double taxation treaty) or the other member country in the assumption of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC)) that the request complies with any of the said treaties referred and endorsed by the Law No 55 of October 27, 2016.

II. Procedures for Implementation

1) Enforcing Compliance with Local Laws

FATCA is intended to detect and deter tax evasion by US persons who hide their money outside the US. It allegedly creates a great transparency by strengthening information reporting. However the implementation of FATCA may involve legal obstacles. It is illegal for the financial institutions of some states such as Lebanon to disclose required information concerning its depositors to US authorities. Implementing FATCA will expose a segment of the clients of Lebanese banks to the US in direct and gross violation of the 1956 Lebanese banking secrecy laws. FATCA grossly violates Lebanon’s banking secrecy laws that were passed in 1956 to further strengthen the financial system in the state. Consequently any bank that follows FATCA regulations would be liable to lawsuits on the grounds of breaching banking secrecy.

And with the IRS searching for American tax evaders abroad it is becoming increasingly difficult for states that have banking secrecy rules to maintain account secrecy. The IRS is actively applying rules and changes to facilitate foreign bank compliance in disclosing information about US taxpayers’ money held in their banks, Lebanese banks are no exception.

How is Lebanon Coping with FATCA?

Lebanese banks have introduced clauses to contracts with clients affected by FATCA allowing the bank to disclose information on their accounts and therefore waiving banking secrecy, until amendment and promulgation of certain laws to meet the requirements of the US law. This way, the client – who is a US person – would agree to lift the banking secrecy on his personal information in accordance with the law 3/9/1956. Nevertheless, this measure has not addressed the main legal problem.

In 2001, Lebanon’s parliament passed law 318 “the law on fighting money laundering” which allows revoking banking secrecy if a client is suspected for money laundering. This law enumerates certain actions which are to be considered as offences that may result of money laundering such as aerial and maritime piracy, extortion, funds embezzlement… And on 24 November 2015 the law #318/2001 was amended, in which ‘tax evasion’ was added as an offence or a reason to lift banking secrecy. This was mainly done to meet the requirements of the US law.

Furthermore a law was passed (Law #55 of 27 October 2016) titled the“exchange of information for tax purposes”. Its ninth article states that this law enters into force regardless of any clause or legal restrictions on exposing information existing in any other law, thereby overruling any previous law restricting the lifting of banking secrecy.

Now that the local law complies with the provisions of FATCA, what are the procedures that govern the exchange of the required information?

2) Enforcing Information Exchange

BDL (Banque du Liban) had attempted to reach a compromise regarding the reporting process under FATCA, proposing to the US treasury department an arrangement where BDL reports on behalf of local banks. However, the American side rejected this wholly, insisting on having a direct relationship between the US treasury and every bank in Lebanon individually.

For this reason Lebanese Banks must report directly to the US without recourse to any national institution such as BDL. This relationship is arguably a trespass against Lebanese sovereignty. Why should our private banking sector be held accountable to the US treasury and IRS without first going through the central bank?

Failure to comply with FATCA comes with heavy sanctions against non-compliant or recalcitrant banks – these sanctions deny them the right to use a US financial institution for representation or correspondence and even the right to open bank accounts in US banks, which would make it difficult for non-compliant banks to settle US-dollar transactions. 1 Some have even argued that FATCA would impact individuals’ remittances to Lebanon.

Though the US law is meant to improve tax revenues, these revenues are for the sole benefit of the US treasury and FATCA actually violates the sovereignty of other states to further political goals.

The US has retained its position of being the world’s largest economy since 1871. The size of the US economy was $20.58 trillion in 2018 in nominal terms. The US is often dubbed as an economic superpower and that’s because the economy constitutes almost a quarter of the global economy, backed by advanced infrastructure, technological innovation, and an abundance of natural resources.

Knowing that the total global loss from individual international tax evasion is between $40 and $70 billion, how much is this actually going to affect the US economy?


Bibliography


Antoine Zaatar
Antoine Zaatar

UL DSP1

Imagination is everything. There is no better way to train imagination than studying law. No artist can explain the secret and beauty of nature as freely as the lawyer explains the truth in the courthouse. That’s why us law practitioners should do whatever it takes to make sure that our justice system prevails.

Interested in international law in general such as IHL, IPL, arbitration, labor law, & commercial law.

  1. It must be noted that there is another law that was created as part of the US initiative to uncover tax cheats hiding money in offshore accounts. This law is called FBAR: Foreign Bank Account Report. The latter obliges US persons with a foreign account balance of $10,000 or more at any time (aggregate account) to disclose it to the US treasury. FBAR predates FATCA and the existence of FATCA doesn’t replace FBAR.