US Congressional Research Service finds FATCA non reciprocal

In a report on FATCA (the Foreign Account Tax Compliance Act), the Congressional Research Service has found that FATCA is not fully reciprocal in information sharing. The IRS receives more information on U.S. owners of foreign accounts than other countries receive on foreign owners of U.S. accounts.

The IRS compliance program has been delayed by resource constraints and, most recently, the coronavirus pandemic. A 2022 report by the Treasury Inspector General for Tax Administration had highlighted difficulties with obtaining taxpayer identification numbers from foreign financial institutions (FFIs), the failure to institute matching, and the lack of focus on non-filers of Form 8938 (the Statement of Specified Foreign Financial Assets).

The problem is that the legislation is not in place to authorise the collection of the data needed for full reciprocity, including account balances and beneficial owners. The Corporate Transparency Act discloses beneficial owners of certain entities, including corporations and limited liability companies but it has not been fully implemented.

The Congressional Research Service notes that this makes the United States one of the major secrecy jurisdictions in the world. The failure of the United States to reciprocate under FATCA has been criticized by the European Union.

The Administration’s FY2023 budget includes a proposal to provide full reciprocity, but if reciprocity is not adopted, other countries could impose withholding taxes on payments to U.S. financial institutions.

The Service envisage the option that the United States abandon FATCA and join the OECD’s Common Reporting Program (CRS). That would eliminate requirements for multiple reporting under FATCA and CRS systems for banks, but certain issues, such as reporting for U.S. citizens abroad, would need to be clarified, since the U.S. tax applies to all citizens regardless of residence.
The Congressional Research Service also considers the situation of Americans living abroad (as the U.S. tax system is largely based on citizenship). U.S. citizens living abroad faced reduced access to financial services as FFIs revaluated the risks and benefits of having U.S. citizens as clients. Treasury allowed certain low-risk FFIs to be deemed FATCA compliant if they did not restrict access to financial services for U.S. citizens.

Accidental Americans

The report also addresses the situation of accidental Americans, because they are born in the U.S. or because they have a parent who is a U.S. citizen but have otherwise little to no tie to the United States. They may not even be aware of their U.S. citizenship unless they are notified by an FFI of their need to comply with FATCA or they are denied entry to the U.S. with a non-U.S. passport.

The FY2023 budget proposes a narrow exemption from certain exit taxes for lower-income accidental Americans. The service proposes to allow them to renounce their U.S. citizenship through a streamlined process.

The stated position of the European Parliament is that being subject to FATCA is not justified for these individuals.