Following the worldwide implementation of the Foreign Account Tax Compliance Act (FATCA) – a reporting regime that obliges financial institutions to disclose certain financial information on their US customers – thousands of law-abiding EU residents realised that they were subject to tax obligations in the US, whereas they thought they had no ties with the US. These so-called ‘Accidental Americans’ could be anyone with an American parent who inherited US citizenship but was born outside the US, or people of other nationalities who happened to be born in the US and who stayed there only a few weeks or months and maintained no ties whatsoever to the US. The US is one of only two jurisdictions in the world that has a taxation system based on citizenship (with Eritrea), as opposed to the domicile and residence concepts which are seen in many other jurisdictions.
These ‘Accidental Americans’ who are residing in or are citizens of the EU, suffer adverse effects as a result of FATCA, such as having their savings accounts frozen and being denied access to banking services due to the reluctance of financial institutions to follow costly FATCA reporting.
Further to a petition submitted by a ‘Collective of European citizens who are either “Accidental Americans” or dual European/US citizens Association of Accidental Americans’, on 5 July 2018 the European parliament adopted a resolution on the adverse effects of FATCA on EU citizens and in particular ‘Accidental Americans’.
In this resolution, the EU parliament acknowledge the difficulties encountered by the EU “Accidental Americans” and calls on Member States and the Commission to ensure that the fundamental rights of all citizens, in particular those of ‘Accidental Americans’ are guaranteed. Furthermore, the EU parliament also raised other concerns, such as the fact that although most of the intergovernmental agreements (IGAs) negotiated with the US are theoretically reciprocal, it seems the Internal Revenue Service (IRS) has not been systematically reporting information on EU taxpayers having financial assets in the US, albeit most of the IGAs have now been in force since 2014.
In the context of the gradual shift from banking secrecy to the globalisation of tax transparency over the last decade, the EU parliament is now raising certain concerns over the effects of the implementation of FATCA within the EU, and in particular its lack of bilateral transparency.
Lack of reciprocity
Following the global implementation of FATCA, which is a bilateral-based system for the automatic exchange of information (AEOI) of financial information, the Organisation for Economic Co-operation and Development (OECD) and the EU, as a member of the Global Forum, launched a multilateral AEOI system, the Common Reporting Standard (CRS).
The US is not participating in CRS and has argued that the AEOI based on FATCA would be sufficient and would make their signature to CRS redundant. Nonetheless, although most of the IGAs entered by the EU Member States with the US are theoretically reciprocal, the EU parliament has denounced the effective lack of reciprocity since 2016, especially in terms of the scope of information to be exchanged, which is broader for Member States than it is for the US. The US is willing to receive but not to share. To date, the US Treasury and Congress have been opposed to the public UBO registers for certain companies and trusts, and has declined to participate in the fully reciprocal AEOI on the basis of the CRS.
As a result, the EU parliament encourages EU Member States to suspend the application of their IGAs until such times as the US agrees to a multilateral approach to the AEOI by either repealing FATCA and joining CRS, or renegotiating FATCA on an EU-wide basis with identical sharing obligations from both ends.
FATCA has resulted in the arbitrary exposure and punishment of individuals who might have no substantive ties to the US. Practices of certain EU-based financial institutions resulted in hindering access to financial services for US citizens and ‘Accidental Americans’, who had their assets frozen and were denied access to banking services. This is, in most cases, due to the high compliance and reporting cost that financial institutions would have to incur when serving clients that are identified as specified US persons.
Such practice by credit institutions is against the anti-discrimination provision of Directive 2014/92/EU, which obliges Member States to ensure that credit institutions do not discriminate against consumers based on their nationality and place of residence. The EU parliament is calling on Member States and the Commission to ensure that the fundamental rights of all EU citizens, in particular those of ‘Accidental Americans’, are guaranteed, especially the right to a private and family life, the right to privacy and the principle of non-discrimination, as laid down in the Charter of Fundamental Rights of the European Union and in the European Convention on Human Rights.
In practice, these EU citizens who are identified as specified US persons, based on a list of indicia outlined in the IGAs, and who do not want to be affected by FATCA as they have no ties in the US, are obliged to renounce their US citizenship, which is a very cumbersome and costly process.
Private data protection
The EU parliament also insists on the importance of guaranteeing the protection of data being transmitted to the IRS by Member States and by US internet platforms providing services to EU customers. EU Member States are encouraged to review their IGAs with the US and to amend them, if necessary, in accordance with the rights and principles of the Global Data Protection Regulation (GDPR).
The European Data Protection Board was also urged to investigate any infringement of EU data protection rules by Member States’ legislation authorising the transfer of personal data to the IRS for FATCA purposes and to initiate infringement procedures against Member States that fail to adequately enforce EU data protection rules.
The council has been called to mandate the Commission to open negotiations with the US on an EU-FATCA agreement in order to ensure a full reciprocal exchange of information, upholding the fundamental principles of EU law, as well as the Payment Accounts Directive. The negotiations should cover the US citizenship renouncement procedure in that the EU ‘Accidental Americans’ should be able to renounce their unwanted US citizenship on a no-fees, no filings and no-penalties basis.
Although the fight against tax evasion by governments is legitimate, the means used to collect information on individuals should be proportionate to the goal – the collection of further revenue. Therefore, it is critical to consider the fundamental rights of taxpayers. The resolution published by the EU parliament is an encouraging sign that the gauge is shifting toward a balance between the taxpayers’ rights and the right of governments to combat tax evasion.
Sonia Brahmi is a senior associate at WH Partners. She can be contacted on +356 2092 5105 or by email: firstname.lastname@example.org.
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