The Foreign Account Tax Compliance

Published Date: 02 Nov 2017

2.2.1 Reporting requirements under the FATCA Regulations.

2.2.2 Withholding Under the FATCA.

2.2.3 Disclosure of Information under the FATCA.

2.3 The aftermath of FATCA

2.3.1: Proposed legislation following the enactment of the FATCA.

2.3.2: How the FATCA was reacted to:

2.4 The relationship between FATCA and foreign countries. (I thought I would be a good idea to move this part of the chapter to chapter 3, as chapter 3 needs some ‘FATCA’ in it and this chapter is a bit too long

2.1 What led to the enactment of the FATCA regulations?

The FATCA came about for numerous different reasons; however the major event that spearheaded the creation of these set of regulations was the global economic crisis the world plunged into in 2008. There are various factors which contributed to this crisis however secrecy jurisdictions are deemed to be one of the main reasons why the global economy has suffered the way it has. Secrecy jurisdictions allow money to be shifted from one economy to another in large amounts, in addition to that through the use of a secrecy jurisdiction the Government of the jurisdiction in which the investor is a tax resident cannot collect the tax due and this proved to be a big obstacle for western governments in this decade. Before 2008 only a small number of experts could envision the detrimental effects that these jurisdictions could have on the world’s economy and it was only after the global economic crisis hit that importance started to be given to the huge amounts of revenue that are being lost due to the secrecy jurisdictions.

It is evident, even from a superficial read of the FATCA regulations that these regulations are going to have a profound effect on business policies and practices in relation to American citizens and tax residents. The FATCA may result in 2 different scenarios; the first being that the rest of the world (including Europe) will choose not to engage in business with the United States and the second being the achievement of a state in which financial accounts [1] are duly monitored and the relevant tax due is paid. Ultimately the FATCA aims at achieving the second scenario.

Offshore jurisdictions [2] have had a great impact on other jurisdictions with meaningful restraints and checks in place. These secrecy jurisdictions promote the idea of opacity which has been a very helpful tool for corporations and high net worth individuals to swerve away any attention from being directed towards their accounts. Hong Kong is a clear example of a modern day secrecy jurisdiction [3] . One can form a Hong Kong company online within a matter of minutes and thus no checks, know your customer and due diligence procedures are in place. This system stands in stark contrast to the system found in Malta [4] and other countries such as the United States, Germany and Luxembourg. The Maltese system seeks to strike a balance between efficiency and integrity, a company in Malta can be registered in as little as three days provided all the documents requested are submitted, the company is then reviewed at two different stages and if all is found to be to the satisfaction of the Registrar of Companies, the company can then be registered. As opposed to the speedy online system in place in countries such as Hong Kong, the documents given to the Malta Financial Services Authority are manually checked and verified by qualified people to ensure their veracity and compliance. In my opinion the Maltese system offers far more security and peace of mind due to the fact that each and every company is individually checked by competent and experienced personnel. The system in Malta is also very efficient and thus Malta can be used as an example of a jurisdiction which can offer both security and efficient. This system ensures that the company is legitimately created and done so for legal reasons.

In July of 2012 the Tax Justice Network published a shocking study which held that at least $12 trillion are hidden in secretive tax havens around the world; this figure may even go up to $32 trillion [5] . This huge amount of unreported financial assets can never be measured accurately and thus the figures may be even higher. These figures shed light on the massive amount of tax evasion that takes place throughout the world. James Henry, the person behind the Tax Justice Network study said that "The consequence (of secrecy jurisdictions) is big companies and people with wealth to do so will pay no taxes on their income and capital and all the taxes will be borne by the rest of us" [6] .

The above situation with secrecy jurisdictions provoked interest within the governments of those jurisdictions which where loosing revenue as a result of secrecy jurisdictions to deal with this problem and give further importance to transparency. Prior to the coming into effect of the FATCA regulations a number of other efforts were initiated to combat this problem in the United States. From the 23rd of March 2009 and the 15th of October 2009 the Internal Revenue Service (IRS) [7] in the United States launched a temporary penalty framework which applied to United States citizens who voluntarily disclosed information regarding their non-United States bank accounts. This initiative was introduced to encourage people to become tax compliant and during this time frame nearly 15,000 [8] tax payers voluntarily disclosed information regarding their foreign accounts to the IRS. Following the closure of this scheme in October of 2009 others continued to make use of this system. The success of the voluntary disclosure system of 2009 led to an in depth evaluation of this system and a revision of its mechanisms by the IRS which resulted in a new and improved voluntary disclosure system being launched in 2011 [9] , all with the aim of increasing transparency with in the United States.

Prior to the enactment of FATCA, the IRS has been keeping track of offshore accounts through a system based on voluntary disclosure. The Reporting of Foreign Bank and Financial Accounts (hereinafter referred to as ‘FBAR’) and the Qualified Intermediary system (QI) are the two main mechanisms in place before the enactment of FATCA. These two voluntary reporting systems helped to shed light on the deficiencies of the voluntary reporting system and eventually led to these shortages being addressed in FATCA.

The FBAR was enacted under the Bank Secrecy Act [10] , this set of regulations requires the person who is subject to pay tax to annually report any foreign accounts belonging to such person which exceed $10,000 in their combined value. The FBAR is based on a self-reporting system and thus due to this system of reporting the success of the FBAR heavily depends on the level of reporting being made. In recent years the United States Government has sought to increase the enforcement of the FBAR and in February of 2011 the IRS published the final regulations amending the FBAR (which became effective on the 28th of March 2011) [11] 

To further enhance the FBAR in the year 2000 the IRS launched the Qualified Intermediary program [12] . A QI is a foreign entity [13] which acts as an intermediary between the IRS and the American taxpayer. In the QI system the QI enters into a withholding agreement with the IRS, this system relies on a voluntary agreement between the IRS and the QI. The QIs have access to information about their account holders in which the IRS is highly interested in. In the QI program the QI has to report and withhold the amount of tax due by the United States offshore account holder to the IRS. In this system the QI stands to benefit as well. By entering into such an agreement with the IRS the QI is able to keep its client list private while benefitting from tax treaty benefits which reduce the percentage of tax owed to the IRS. Thus the main incentive available for intermediaries which opt to become qualified intermediaries is that they can apply for treaty benefits for their clients without disclosing their client’s identity [14] . It can be said that the provisions of FATCA seem to provide for an overlap in the reporting require in the QI program and the reporting required for FATCA.

Treaties, such as double taxation treaties, which are designed to increase the sharing of taxpayer information, are vital to the aim of the IRS to enforce payment of tax on foreign accounts held by United States taxpayers. When people change their country of tax residence one common and undesired consequence is double taxation resulting from two jurisdictions asserting taxing rights over the income of the same person. The Organization for Economic Co-operation and Development (OECD) has sought to remedy this situation and establish a sustainable system of exchange of information for tax purposes through its proposed model tax treaties and information exchange treaties. The OECD and its role in global transparency will be discussed in further detail in the following chapter of this thesis.

The FATCA was not the only law of its kind introduced in the United States in recent years. In 2009 senator Carl Levin proposed the Stop Tax Haven Abuse Act (STHA) [15] . This was later on amended and presented again on the 12th of July 2011 [16] . The most recent version of the STHA complements the FATCA and makes up for its shortcomings together with further curbing arrangements which aim at reducing the amount of tax payable in ways which were not intended by the United States Congress. The STHA goes on to close certain loopholes found in United States law by for example, treating corporation which primarily do business in the United States as being domestic corporation and thus being subject to domestic United States taxation, furthermore the STHA also creates a number of rebuttable presumptions (similar to the FATCA presumptions) which will enable the IRS to establish ownership and control of offshore entities. The SHTA was referred to committee on the same day as it was presented and it has not yet passed this committee stage [17] .

The system of tax collection in the United States was initially based on a self-assessment method in which the tax payer determines the amount of tax payable to the government and not the other way round. The voluntary reporting system needed other additional reinforcements and measures for there to be an effective taxation system in the United States. The IRS has implemented a number of different mechanisms to try and narrow the large tax gap [18] between the amount of tax that is meant to be collected and the amount that is actually collected, the most significant being punishing non-filing through criminal penalties and the implementation of a withholding tax.

Withholding tax is significantly different than other forms of taxation, such as value added tax, due to the fact that a withholding tax is withheld at the source and thus the taxpayer does not have time to dispense of the income received before declaring his income, in this way double non-taxation is avoided. For a system of withholding taxes to be successful, third party (for example an employer or a financial institution) cooperation is essential and thus in a system of withholding taxes it is not only the government and the taxpayer that are involved, the third party issuing the payment must disclose information, such as the identity of the employee, to the government department responsible for collecting tax. Even though to an extent, such a system of withholding taxes may have sparked a fresh interest in underreporting, withholding the amount of tax due (withholding is done by the payer himself) is a highly successful way of collecting tax and thus its use in the United States has thrived [19] .

"Amounts subject to withholding (e.g., wages and salaries) have a net misreporting percentage of only 1.2 percent. Amounts subject to third-party information reporting, but not to withholding (e.g., interest and dividend income) have a slightly higher net misreporting percentage of 4.5 percent. Amounts subject to partial third-party reporting (e.g., capital gains) have a still higher net misreporting percentage of 8.6 percent. Amounts not subject to withholding or information reporting (e.g., Schedule C income and "other income") are the least visible, with a much higher net misreporting percentage of 53.9 percent." [20] 

In the 1990’s the United States treasury department sought to improve its current tax regulations and pursued an exercise which would establish a more comprehensive and reliable taxation system. The importance of this new system culminated in the following decade which saw the world’s global economy in desperate need for stricter tax regulations. The need for more transparency multiplied and became an ever increasing matter of importance. FATCA has long been due not only in the United States but also in other countries since the problem of tax avoidance and evasion is present throughout the world. Whether or not FATCA is to be successful cannot be determined not, however as I have explained above, withholding tax at the original source has positive outcomes and so do pecuniary penalties, in light of this FATCA should be able to reach one of its aims, that is, generation of revenue. The success of FATCA however is tied to the level of international cooperation offered. As it is international response to FATCA is positive and it this continues to be so FATCA can prove to be a new movement against tax evasion and tax avoidance.

The enactment of the FATCA regulations is a step in the right direction in the fight against evasion and avoidance of taxation, as can be seen through an explanation of the mechanics of the FATCA these set of regulation impose conditions, such as the automatic withholding, which will pressure. The FATCA seeks to remedy the loopholes left by the QI reporting system and to make up for the deficiencies of the tax treaties already in place. FATCA has brought together the United States’ successes and failures with regards to international tax collection, with the end product being a well thought mechanism which if taken care of can result in clamping down tax evasion not only in the United States but throughout the world.

2.2 An overview of the FATCA.

The foremost important result of the FATCA is the "detect, deter and discourage" [21] United States tax evasion through the use of offshore accounts and investments. FATCA aims at increasing reporting by providing the incentive of no withholding for those who choose to disclose the information required by the FATCA. As will be shown below FATCA helps in the early detection of offshore tax evasion and this detection will further deter future evasion and help establish a sustainable reporting system. In addition to this, the FATCA was included in the Hiring Incentives to Restore Employment Act of 2010 and thus it is only reasonable to conclude that FATCA acts as a means to raise revenue and increase employment, the increase in the number of people employed both with the IRS and in the private financial sector will inevitably increase once the FATCA regulations are in place, the stringent structure of the FATCA and the many requirements it imposes creates the need for an increase in the number of human resources in the financial sector.

In 2010 a new chapter (chapter 4) was introduced to the Hiring Incentives to Restore Employment (HIRE) Act [22] . In a nutshell this new chapter 4, which came into force on the 1st of January 2013, requires foreign financial institutions (FFI) to enter into disclosure agreements with the IRS in which the FFI will disclose information regarding any of its United States account [23] holders. Failure to do so will result in a 30% withholding tax of United States source income. What caused the initial adverse reaction to FATCA in my opinion is the automatic withholding factor in FATCA, on the other hand, without this automatic withholding FATCA will not have the imposing and urgent presence it has. The United States source income [24] referred to in the FATCA does not simply refer to dividends and interests but also to gross income from the sale of any assets which may have produced such dividends or interests. Ultimately, it has been held by IRS officials that the aim of the IRS is not to collect revenue through the operation of FATCA but rather to establish a relationship of trust between tax payers and the IRS which will, in due course, result in a fair system of taxation [25] .

The FATCA regulations are based on two ‘pillars’. The first pillar being a system of mandatory reporting and the second pillar is that of a withholding penalty. These two pillars are intrinsically dependent on each other, that is, if the reporting requirements established in FATCA are not met then the withholding mechanism comes into play and vice versa. The FATCA makes a distinction between Foreign Financial Institutions (FFI) and Non-financial Foreign Entities (NFFE) as different rules pertain to these different entities. A FFI is defined as "any financial institution [26] which is a foreign entity. Except as otherwise provided by the Secretary, such term shall not include a financial institution which is organized under the laws of any possession of the United States" [27] , as per the definition found in the law. (Therefore a FFI is any foreign institution which accepts monetary deposits and holds financial assets on behalf of third parties and thus includes banks, investment funds, insurance companies, hedge funds, private equity funds and pension funds. On the other hand an NFFE is defined as "any foreign entity which is not a financial institution" [28] . This general definition of NFFE has a number of exception to if found in Article 1472 (c) of the HIRE Act. [29] 

FATCA provides for four different ways in which FFIs and NFFEs can conform to the new rules issued by the United States Government [30] . The first and most straight forward method is for the FFI to enter into an agreement with the IRS, this agreement will provide for the FFI to handover all the requested information about its’ United States account and/or their United States owners. This will eliminate the imposing 30% withholding tax, provided the agreement is continually respected by the FFI. In the case of a group of FFIs all of the members of that group have to participate in the agreement with the IRS and become compliant before any individual FFI can.

The second method envisioned by the law is for the FFI to be deemed as nonparticipating that is not having an agreement with the IRS (the opposite of the first method). As a consequence to being a nonparticipant, the FFI will be subject to withholding tax and contrary to what many may think, this withholding susceptibility does not relieve the FFI from its reporting duties. The third situation is for the FFI to be withheld upon rather than to effect the withholding payment itself on payments made to recalcitrant account holders [31] and non-participating FFIs. This third method is particularly useful in a situation where the FFI cannot obtain the required information from the account holder itself. This aim of this provision was to provide a relief for FFIs who find themselves in such a situation; however this is not to provide a permanent situation for those "recalcitrant account holders" [32] . The fourth solution is for the FFI to choose to be in the same reporting scheme as a United States financial institution, the FFIs which elect to be subject to this would need to fill in Form 1099 [33] . As a result of filling up Form 1099 no reporting of account balance or value and withdrawals from the account would be necessary.

As mentioned above FATCA does not withhold on conventional payments only. FATCA (similarly to chapter 3 of the HIRE Act) imposes withholding tax on interests, dividends, wages and rents, in addition to this Chapter 4 goes a step further than its previous Chapter 3 and also imposes withholding tax on the sale of interest producing properties from sources in the United States. It is here where FATCA introduces taxation of assets which were not susceptible to taxation before the enactment of the FATCA. In the cases where withholding takes places (that is when the FFI fails to meet the required reporting thresholds) over withholding may occur. This may result in a situation where the FFI is eligible for a tax exemption [34] the IRS will issue refunds and the FATCA allows for a 180 day grace period (during which no interest for the money which was unjustly withheld shall be paid) for the refund to be remitted [35] . The refunds for overpaid tax may be issued in two ways, either by reducing the following withholding to take place or by giving an exempt period from withholding.

2.2.1: Reporting requirement under FATCA.

FATCA require FFI to report a great amount of information on the accounts under their custody which are owned by United States persons or by United States owned entities. The FATCA places a huge burden on the FFIs and requires them to constantly monitor and provide reports on these accounts, not only on the opening of the accounts but throughout their lifetime with that particular FFI. Reporting requirements are also in place for NFFEs which are required to report whether or not they have any United States owner and if so they would have to report on those specific United States owners (subject to the exemption pertaining to NFFE as mentioned above).

The reporting requirements pertaining to FFIs vary depending on which conformity method is used (see above). In the first method, that of entering into an agreement with the IRS, the FFI will have to comply with the following so as to fulfill its agreement with the IRS. The FFI will need to supply enough information on each of the accounts maintained by such FFI as is necessary for the IRS to determine whether the account is a United States account of not. The second requirement is for the FFI to comply with any verification requirement and due diligence procedures with respects to the identification of United States accounts. In the case of the account being subject to any foreign law which prevents the reporting of any of the information requested by virtue of Article 1471(c), the IRS places a rather heavy requirement on the FFI. In this case the FFI will have to try and obtain a waiver as to the prevention of supply of such information and in the case where such waiver is not granted within a reasonable time frame, the FFI will have to close such account The final two requirements are only in place when the account is determined to be a United States account, in such a case the FFI which maintains such an account will have to provide an annual report [36] in accordance with Article 1471(c). Furthermore the FFI will have to produce any additional information as requested by the IRS. In the case of any FFI which is treated as a QI, the reporting requirements mentioned in this paragraph must be coupled with any additional requirements imposed on QIs.

Article 1471(c) provides for the information required to be disclosed to the IRS in the case of United States account holders. First and foremost the name, address and tax identification number of each account holder (both in the case of specified United States person and in the case of United States owned foreign entity). Following this, the account number and account balance [37] together with the gross receipts and withdrawals or payments conducted through such account has to be reported to the IRS.

2.2.2 Withholding Under the FATCA.

What makes withholding under the FATCA different than any other withholding is that the FATCA forces the taxpayer to report at the risk of being additionally taxed rather than simply enforcing taxation through a withholding system (by withholding tax at the source). The general premise under Chapter 4 is that if the requirements of the IRS under FATCA are not met, a 30% withholding tax is applied. These reporting requirements are generally due to have come into effect on the 1st of January 2013. The person required to effect the deduction and withholding (both in the case of FFIs and NFFEs) shall be made liable for such an amount. The ability (or rather willingness) to withhold this 30% is one of the requirements imposed by the FATCA for an FFI to be deemed compliant. With respect to each holder of a United States account, the general definition of a ‘United States account’ [38] holds that the aggregate value of accounts owned by the same (natural) person and maintained by the same FFI must exceed $50,000 in value. In the case of financial institutions which are members of the same affiliated group they shall be treated as a single institution for the purposes of the $50,000 threshold.

If an agreement is in place between the FFI and the IRS, the FFI will have to deduct and withhold the 30% tax in the following two situations. The first being on any "any passthru payment which is made by such institution to a recalcitrant account holder or another foreign financial institution" [39] which does not meet the requirement established by the IRS for such an account to be deemed compliant. In the case of such a passthru payment [40] which is made to an FFI which has elected to be withheld upon rather than to withhold the 30% tax itself, the 30% withholding is applicable on such a payment as is "allocable to accounts held by recalcitrant account holders or foreign financial institutions which do not meet the requirements of this subsection" [41] . The general exemption clause (also applicable to NFFEs) is applicable to Article 1471(a). The 30% withholding shall not apply when the beneficial owner is a foreign Government or an international organization and any foreign central bank. This article finishes off with an umbrella clause holding that such an exemption from the withholding shall apply to "any other class of persons identified by the Secretary for purposes of this subsection as posing a low risk of tax evasion." [42] 

Towards the end of FATCA a grandfather clause catering for outstanding obligations is found. On October 24th 2012 the IRS issued Announcement 2012-42 [43] which was then followed by the actual final regulations pertaining to the FATCA on the 17th of January 2013 [44] . These helped to define and make clear the position of grandfathered obligations. Generally speaking a grandfathered obligation is an obligation which is outstanding on 1st of January 2014 [45] (this was originally on the 18th of March 2012 and was extended though announcement 2012-42 and later through the published FATCA regulations by the IRS). Obligations due to the IRS which are outstanding on the 1st of January 2014 [46] together with gross proceeds from the disposition of such obligation are exempt from the tax due by virtue of the FATCA. Originally the meaning of a grandfathered obligation included any legal agreement that is able of producing a passthru payment, and this includes withhold able payments. However, this excludes any legal instrument that is viewed as equity for United States tax purposes and any legal agreement which does not have an expiration date. A legal agreement which results in withhold able payments has exceptions to it and does not include brokerage agreements and any agreement to hold financial assets for other persons. Furthermore this excludes any agreements to receive payments of income and other amounts which are connected to such financial assets. It is important to note that if any important modification is made to such an obligation which relates to the substance and the relevant facts and circumstances of the obligation are made, such an obligation will lose its grandfathered status, and thus be susceptible to withholding.

Following announcement 2012-42 the meaning of a grandfathered obligation was extended to also include foreign passthru obligations [47] , dividend equivalent obligations and collateral for notional principal contracts [48] . A foreign passthru obligation that is to be grandfathered includes any obligation that is able of producing a foreign passthru payment and such obligation is not able of producing a withhold able payment on the condition that such an obligation is due as of six months after the promulgation of the final regulations which define such foreign passthru payments. This inclusion of foreign passthru payments eliminates the question as to whether obligations which give rise to foreign passthru payments which are not withhold able payment are eligible for grandfathering or not.

The meaning of a grandfathered obligation is to also include dividend equivalent obligations and thus such an obligation will include any instrument which gives rise to a dividend as is defined under Article 871(m) of the HIRE act (that is a dividend arising from a United States source), this is subject to the condition that such an obligation is executed on or before six months after the date on which such obligation is first regarded as giving rise to dividends. Agreements which require a secured party to make payments with respect to collateral securing one or more grandfather obligation is also included in the extended meaning given to grandfather obligations in the final guidelines of January 2013. The FATCA final guidelines of January 2013 clearly indicate that if a debt obligation has United States tax purposes, it is then considered as an outstanding obligation on, and after the 1st of January 2014. On the other hand an obligation which is not a debt is considered to be an outstanding obligation on a date prior to the 1st of January 2014, provided that a legally binding agreement with respect to that obligation was executed.

2.2.3: Disclosure of Information under the FATCA.

Article 6038D of Chapter 4 of the HIRE Act holds that "any individual who, during any taxable year, holds any interest in a specified foreign financial asset shall attach to such person’s return of tax imposed by subtitle A for such taxable year the information described in subsection (c) with respect to each such asset if the aggregate value of all such assets exceeds $50,000 (or such higher dollar amount as the Secretary may prescribe)". The regulations go on to specify the information that needs to be disclosed so as to avoid the withholding and/or the penalties. To start off with the name and address of the financial institution that maintains the account together with the account number of such an account. In the case of stocks and securities subject to FATCA withholding tax, the name and address of the issuer and further information necessary to identify the class of issue of which such stock or security forms part of. For any other instruments, contracts or interests the names and addresses of all issuers and counterparties is necessary, together with any such information necessary to identify such instrument, contract or interest. In addition to all these, the maximum value of assets during the taxable year needs to be disclosed.

The FATCA allows the IRS to make exemptions from reporting so as to avoid duplicate reporting [49] . Furthermore FATCA also provides for penalties should failure to report occur. A $10,000 penalty is fixed for failure to report and this amount increases by a further $10,000 for every thirty day period, or part thereof, provided the failure to report continues for more than ninety days after the notification by the IRS has been issued. Nevertheless the IRS can waive this penalty if it is satisfied that failure to report was due to a reasonable legitimate cause and not willful negligence and disrespect for the law. In addition to this, the penalty imposed with respect to failure to report required information shall not exceed $50,000.

The FATCA makes a number of presumptions which add on to its effectiveness, furthermore these presumptions act as an incentive for financial institutions and account holders to conform to FATCA. Failure to do so will result in the IRS making presumptions which may act against the account holder. The first presumption is that if an individual in whom the IRS is interested does not provide the necessary information required by the IRS then the IRS will assume (and it is then up to such an individual to rebut this assumption) that the aggregate value of the assets held by such an individual exceed $50,000. This is done for the purposes of evaluating the penalties to be imposed for failure to disclose. The second presumption is in relation to trusts and to persons that indirectly or directly transfer property to a foreign trust. In such a case the FATCA holds that if the beneficiary fails to report to the IRS and satisfies the requirement of the IRS then the IRS is to assume that such a trust has a United States beneficiary. The effectiveness of the FATCA is that these presumptions are set in motion if the taxpayer fails to act. This goes on to further strengthen to need to comply with FATCA and to provide the necessary information so as not to be liable to tax not duly owed. What these presumptions do is shift the burden of proof onto the individual should they not comply with FATCA. With the onus of proof shifted onto the individual once again the individual is being pressured to recognize and conform to FATCA.

2.3: The Aftermath of the FATCA:

2.3.1: Proposed legislation following the enactment of the FATCA.

The withholding regime imposed by the FATCA is different than other withholding systems found in the United States. There are three notable differences in the way FATCA withholding operates. The first is that in the FATCA, withholding is imposed so as to coerce entities to enter into information sharing agreements rather than to guarantee tax compliance. Prior to the FATCA, withholding was used as a method by which tax was collected up front and furthermore withholding was regarded as a fair and efficient method of tax collection. The second notable difference is the disincentive system created for those who fail to comply, this stands in contrast to the other system in place in the United States, where an incentive-based approach is in place for those who chose to comply with the rules in place. Through this system of withholding the FFIs are only forced to comply with FATCA due to very strong repercussions in place for non-compliance. The final notable method of implementation of withholding tax which departs from existing methods is that the FATCA fails to consider the effect it will have on existing tax treaties. It is thus of paramount importance that the FATCA is implemented correctly as if this is not done other existing United States obligations towards foreign entities in which the United States has existing tax treaties may be adversely affected. One must keep in mind that the FATCA does not intend to override existing treaties with the consequence of imposing a higher tax then that established by the said existing treaties, however this may be an unwanted consequence of the FATCA. The United States must ensure that its previous commitments to other nations are to be continually respected and not overridden.

The FATCA is indeed a step in the right direction in seeking to eradicate offshore accounts and methods to avoid and evade tax, however some may think that the FATCA does not provide for this solution wholly. Indeed Senator Levin and Representative Lloyd Doggett identified the shortcomings of the FATCA and introduced the ‘Stop Tax Haven Abuse Act’ [50] (STHA). This Act is aimed at both corporate and individual taxpayers and seeks to make certain secrecy jurisdiction-related activities illegal. Furthermore the STHA seeks to require further information reporting with respect to funds which are held offshore. The STHA is aimed at complementing the FATCA and it has been stated by Senator Levin himself that the FATCA cannot achieve its full effective state without the STHA to complement it.

The STHA relies on a number of rebuttable assumptions which are made in favor of the IRS. These presumptions are what ultimately may lead to the success of the STHA should it ever be enacted. The fact that the STHA makes such rebuttable presumptions against the taxpayer shifts the burden of proof (if such presumptions are being opposed) on the tax payer himself and not on the financial institution representing such tax payer. The rebuttable presumptions create a necessity for the person liable to pay tax to take action and either accept or oppose the presumptions made. Idleness is once again punished and thus viewed as negative state of presence. In the case of a person having an offshore account the STHA will enable the IRS to presume that such an account holds more than $10,000 and thus an obligation is put on the account holder to report such an account under the FATCA. The second rebuttable presumption put forward by the STHA once again works against the account holder and in favor of the IRS. In the case of a person who has had dealings with an offshore account (namely forming such an account, transferring assets and/ or was a beneficiary of an offshore account and persons who has received money of property and/ or been in control of such an account) the presumption will be that the funds received from such an offshore account are taxable and any funds which are being sent to the offshore account have not yet been taxed. A third presumption brought forward in the STHA is directly linked with FATCA, this holds that in the case of any proceedings involving United States tax residents which have accounts in financial institutions which are not FATCA complaints the court would automatically presume that offshore entity set up in connection with those funds is fully controlled by the tax payer in question.

The STHA works mostly to combat the disadvantages posed on information sharing and transparency by secrecy jurisdictions. through the STHA those having account in secrecy jurisdiction will be to an extent ‘forced’ to disclose information to avoid the risk of having unfavorable presumptions at work against their interest. The ultimate advantage of the STHA is that is it can be proven by the United States authorities that a person has an offshore account, then following this information the authorities can then assume (through the mechanisms of the STHA as explained above) that such accounts are liable to tax with the United States.

One other proposition brought forward by the STHA is with regards to how offshore accounts are viewed. The STHA basically proposes that if an account at face value seems to be a United States account then in actual fact it will be dealt with as if it was a United States account. This will once again work best when dealing with secrecy jurisdiction and is aimed at further provoking such secrecy accounts to disclose information vital to the United States authorities. With regards to this, the relevant provision of the STHA holds that any corporation that is managed and controlled by a person (or persons) who is primarily a United States resident and that such corporation is either publicly traded or has an aggregate value of gross assets of $50 million or more, then in this case the IRS may treat and regard such a corporation as a United States domestic corporation for tax purposes.

The third provision of the STHA which will help strengthen the FATCA and keep increasing transparency in taxation matters is a provision which will be imposed on tax practitioners and tax advisors while these are meting out advise with regards to taxation. Separately from the FATCA and the STHA the United States congress has included in the laws of the United States the ‘economic substance doctrine’ [51] . In a nutshell this doctrine holds that if there is no vital and real reason for a corporation to be set up which is independent and profit producing, then the setting up of such a corporation has no economic substance and as a consequence the authorities (including the courts) will treat such a corporation as being a redundant entity and will deal with them as if they have never come into existence. This doctrine is indeed a step in the right direction however it does have shortcomings to it as well, mainly due to the fact the economic substance doctrine only addresses the problem after it has been made and does not pose any preventive measures. Through the STHA the United States tax resident should be deterred from setting up tax scheme which aim at reducing tax liabilities by distorting the fine line between tax evasion and tax avoidance. As is the ultimate function of the STHA, its objectives aim at making up for the short coming of the ‘economic substance doctrine’. Indeed the STHA may be viewed as a law whose purpose is to make up for the deficiencies of other laws.

The practitioner who creates an abusive tax structure will be liable to 150% of such a practitioner’s gross income [52] from that abusive activity. The fact that the liability has been increased to 150% does not make it viable for the practitioner to engage in such undertakings. Had the percentage been below a 100% a percentage of income from these abusive activities will still be kept by the practitioner and thus a profit will still be made. The STHA furthermore seeks to implicate those who aid and abet abusive tax schemes and this includes lawyers, investment firms, banks, accountants and auditors who work to make the scheme a success [53] . Thus, similar to the tax consultant (who comes up with the taxation scheme) those who aid and abet such activities will be liable for 150% of their gross earnings received from such services rendered in relation to such an activity. The STHA goes a step further and prohibits payment to be made on the basis of the percentage of savings made thought the tax structure set up [54] , as this method of payment will only fuel more interest in exploring methods and finding ways to reduce tax liability.

When coupled up with the SHTA the FATCA can realize its true potential, the STHA makes up for the deficiencies of the FATCA (amongst other laws) and furthermore also makes up for the circumstances which had not been envisions by the FATCA. However, the STHA has a number of proposals which also occur in the HIRE act including the shift of the burden of proof, the statute of limitations and the information reporting on United States beneficial owners of foreign accounts. This act goes on to revise the QI program and increases the information to be disclosed and collected by these QIs, it also strengthens the FBAR. It can be said that the STHA seeks to make up for the shortages of the other acts dealing with tax evasion and avoidance in place. What the STHA will do, should it ever be enacted is give the right tools to the other acts (for example those mentioned above) to fully function all together.

2.3.2: How the FATCA was reacted to:

The FATCA sparked a multitude of different reactions ranging from extremely negative reactions to responses which welcomed these regulations with open arms. As happens with every piece of legislation enacted, a list of pros and cons may be listed, however in the case of the FATCA a number of lobby groups seem to want to focus on the cons and the ever lasting effects these will have on the economy of the United States. The object of the FATCA is to reduce (with the hopes of totally eliminating) the number of people who do not pay the rightful amount of tax due to the United States and thus ultimately increase its tax revenue. However by enacting the FATCA the United States government may have paved the way to a number of unwanted consequences. It has been stated that FATCA "is most likely to collect United States authorities less tax than it costs to gather the information" [55] . Another feared detrimental effect warned against is that foreigners and FFIs may choose to withdraw their investments from the United States so as not to be susceptible to FATCA [56] , furthermore the that FATCA "may end up killing more United States jobs than all the call centers in India combined" [57] .

FATCA may indeed have a very negative effect on the United States economy. FFIs may now be inclined to refrain from dealing with the United States itself and its citizens to avoid being accused of "harboring United States tax evaders [58] ". FATCA will inevitably add a massive financial burden on institutions (financial institutions in particular) due to the number of added procedures which need to be implemented in order to be FATCA compliant, for these procedures the be implemented an increase in human resources is necessary. FATCA is not a new tax, FATCA is a set of requirements imposed by the United States Government which will lead to severe repercussions should they not be followed.

The FATCA may indeed have a number of positive results, first and foremost it will enhance tax compliance and if the FATCA’s aims are truly realized it will bring a large percentage of people to become tax compliant in accordance with the United States law. In addition to this FATCA will create a network of information which will eventually be automatically shared with Governmental Authorities of other countries which have entered into an agreement regarding FATCA with the IRS, this information should be used for the purpose of identifying income being earned by residents of one country in another country. This automatic exchange of information may actually bring about more efficient systems in place [59] which will do away with the multiple gathering of the same information. Once the information gathered (through the FATCA) is in the information system of the IRS, that information will contribute to the better enforcement of the United States tax regimes. The FATCA does not only gather information on taxable event but also collects information on non-taxable events and thus this widens the scope of information being accumulated by the FATCA. The most favorable way to incorporate the FATCA regulations in the everyday practices of financial institutions is by integrating the FATCA requirements with the ‘know your customer’ procedures in place in the financial institutions. If this is done, the FATCA regulations may be viewed as an enhancement of the ‘know your customer’ procedures.

In the article entitled ‘FATCA Compliance May Proliferate via Peer Pressure’ [60] the author Remy Farag makes a valid point in saying that many financial institutions will comply with the requirements of the FATCA thought coercion. The consequences of non-compliance are too big and thus the financial institutions have no other route to take but to comply with the FATCA. The initial leaders in FATCA compliance were the banks and by time other institutions such as insurance companies and financial institutions took an interest in the FATCA and started to voice their concerns on the application on these regulations [61] . The success for the implementation of the FATCA also depends of different departments working together, the legal and the tax department must fully co-operate for the FATCA to be a success, both on an institution level and at a Governmental level.