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      Hello! What’s your number?

      Hello! What’s your number?

      The United States wants to clamp down on US tax evaders hiding their money at financial institutions outside the country. There is legislation with sharp claws to help reach this goal. It is called FATCA and stands for “Foreign Account Tax Compliance Act”. This law will come into effect by July 2013 and has an extraterritorial effect. At a PwC breakfast meeting in Luxembourg, the discussion turned around the question: FATCA, is it a priority in 2012?

      7 million US citizens live outside the United States- and only 10% of them file a US tax return. The Obama administration wants to change things this. With FATCA, it is about collecting tax income from sources that were previously hidden from the IRS, the Internal Revenue System. The loss in revenue is estimated to be about 10 billion dollars over 10 years.

      FATCA requires financial institutions to identify and report American customers. The challenge for the foreign financial institutions will be to properly identify US accounts holders and relevant revenue sources. It would require them to collect required documentation, report to the US tax authority IRS and withhold taxes where applicable. Non-compliance will result in a 30% withholding tax on payments out of the US.

      The proposed regulations include, among others, indices of US telephone numbers, US resident address or mailing address and a signatory authority granted to a person with an address in the United States. FATCA strongly encourages foreign institutions to enter an agreement with the IRS to obtain information from each account holder, to comply with verification and due diligence procedures and to provide the US tax authority with further information upon request.

      We will find you wherever you are

      This law has an extraterritorial effect, and thus goes beyond the US territory. This means that Luxembourg-based companies would have to comply with US legislation, which contradicts Luxembourg law and the double-tax treaty signed with the United States.

      During a recent visit in Washington, Luxembourg’s finance minister Luc Frieden had several meetings with US officials to discuss topics such as FATCA. At a press briefing afterwards he said that Luxembourg shares the objectives of this law, meaning that clients must pay taxes in their home country. But he stressed that the automatic exchange of information is contrary to Luxembourg’s national legislation.

      Olivier Carré, Financial Services Regulatory Advisory Partner at PwC Luxembourg reminds us that five EU-Member States have already signed a bilateral agreement with the US in order to become FATCA partner countries. This means that Germany, France, Italy, Spain and the UK will impose a FATCA-like regime nationally by transposing US law requirements into their national law.

      Mr Carré adds that the benefit is two-fold. “There is exchange of information on a reciprocity basis. These five countries receive the information from the US basically on what they deliver to the US. The benefit for the local actors: if a foreign financial institution does business in any of the other partner countries, it will need to register to the US Treasury but will not have to comply with all the reporting obligations to the US Treasury. It will need to report to its local tax authority, which will take the information and exchange it with its US counterparts.”

      A question of time

      Kerstin Thinnes is tax partner at PwC Luxembourg. She explained that there would be no withholding on the payments, because there is no need to. “It is about complete transparency and disclosure. There is no recalcitrant client or a non-participating foreign financial institution involved,” she explained. 

      It is obvious that this widely and intensely discussed US regulation has a growing impact on EU laws, which is to say the European Savings Directive. If Luxembourg were to enter into an intergovernmental agreement with the US, this would partially reduce the FATCA compliance burden and withholding tax risk.

      But there is another side of the coin, as Olivier Carré explains, “If you enter into an agreement with the US you give away the banking secrecy. This is one more step towards exchange of information. It is not the US clients that are facing an issue at the moment. I first need to check my business model with regards to all my other clients coming from France, Belgium and Germany”. 

      He adds that it will close in sooner or later because the Danish EU-Presidency has hinted that in the new version of the savings Directive, the goal will be the exchange of information. There is no withholding tax model foreseen at this point. CW