Jwala Rambarran: Foreign Account Tax Compliance Act (FATCA) -
imperial outreach or hidden opportunity
Opening remarks by Mr Jwala Rambarran, Governor of the Central Bank of Trinidad and
Tobago, at the meeting of the Council of Securities Regulators of the Americas (COSRA),
Port of Spain, 29 October 2012.
* * *
Ladies and Gentlemen,
I thank the Trinidad and Tobago Securities and Exchange Commission (TTSEC) for inviting
me to speak at the Opening Ceremony of the 2012 meetings of the Council of Securities
Regulators of America (COSRA) and the Caribbean Group of Securities Regulators (CGSR).
As I look across at this august gathering of securities regulators from North, Central and
South America, the Caribbean and even from Europe, I am reminded of the prescient words
of former U.S. President John F. Kennedy at his address to the Canadian Parliament in May
1961, "Geography has made us neighbours. History has made us friends. Economics has
made us partners, and necessity has made us allies."
The global economic crisis, which is now in its fifth year, has certainly made us partners.
Countries cannot successfully regulate their financial markets in isolation. Going it alone is
no longer a viable option. Closer international partnership between regulators has never
been so important - and yet so challenging.
In my remarks this morning, I would like to first share my perspective on an issue that is not
only of immediate concern to all regulators in the Americas, but also an issue that has the
potential to deepen our model of engagement from that of partners to allies. I speak, of
course, about the Foreign Account Tax Compliance Act, otherwise known as FATCA.
Secondly, I would briefly describe the context in which the Caribbean would have to attain
FATCA compliance, if countries are so desirous.
I will end with the state of FATCA preparedness of Trinidad and Tobago, and some key
messages for moving forward.
What is FATCA?
Ladies and Gentlemen, since FATCA was enacted in March 2010 by the U.S. government as
part of the Hiring Incentives to Restore Employment (HIRE) Act, it has generated much
heated debate and has been described in rather uncomplimentary terms. FATCA has been
hailed as:
"A ticking time-bomb";
"An attempt to convert foreigners into unpaid IRS agents";
"A kind of U.S. backward imperialism".
FATCA requires foreign financial institutions to report directly to the U.S. Internal Revenue
Service (IRS) all clients who are U.S. citizens, green card holders living in the U.S. or
abroad, or who are foreign entities in which U.S. taxpayers hold a substantial ownership
interest.
To properly comply with these new reporting requirements, a foreign financial institution will
have to enter into a special agreement with the IRS by June 30, 2013. Under this agreement,
a participating foreign financial institution will be obligated to:
1. Obtain information to determine which account holders are U.S. persons;
2. Comply with verification and due diligence procedures on such account holders as
required by the IRS; and
3. Report annually to the IRS on the name and address of each U.S. client, as well as
the largest account balance in the year and total debit and credits of any account
owned by a U.S. person or foreign entities with substantial U.S. ownership.
The penalties are steep for non-compliance. A participating foreign financial institution will be
required to deduct and withhold a 30 percent tax on ALL payments of U.S. source income
(such as interest and dividends) as well as U.S. source capital gains made to recalcitrant
account holders (those who do not willingly and promptly provide the requested information),
and to foreign financial institutions that did not enter into an agreement with the IRS.
In addition, FATCA requires U.S. citizens and green card holders who have financial assets
outside of the United States exceeding US$50,000 to report these assets to the IRS. FATCA
focuses on the high net-worth individuals, the so-called "FATCAts".
If a foreign financial institution refuses to comply with these requirements, a withholding tax
of 30 percent will be applied on all U.S. source income of that institution, regardless of
whether or not such payment was made for the benefit of the U.S. account holder, for
another client, or for the institution itself.
Foreign financial institutions, as currently drafted, may broadly include every member of the
investment community and encompass banks, credit unions, custodians, asset managers,
investment funds and pension fund schemes, brokers and insurance companies (where their
products have an investment element).
Ladies and Gentlemen, it would be quite easy for some non-U.S. institutions to believe that
they will not be affected by FATCA, as they do not have any U.S. investors. But FATCA
paints with a very broad brush. The legislation is structured so that all accounts will be
or „recalcitrant‟ unless the institution can demonstrate it undertook
deemed non-compliant a
rigorous due diligence process to prove it has no U.S. account holders. Otherwise the
30 percent withholding tax will be applied. Moreover, correspondent banks everywhere may
refuse to deal with a financial institution unless that institution can show it is FATCA
compliant.
Potential impact of FATCA
Ladies and Gentlemen, FATCA has the potential to affect every person or entity that has any
interest in U.S. assets - in either capital value or income arising from these assets.
American Citizens Abroad (ACA), a Geneva-based organization representing the interests of
six million Americans living abroad, launched a campaign to repeal FATCA. The ACA claims
that "FATCA is an unacceptable manifestation of U.S. financial imperialism that imposes
U.S. law on the rest of the world; this can lead to systematic destabilizing of international
financial markets."
So, should we really be concerned about this so-called "ticking time bomb"?
Let me underscore that the aim of FATCA is to target those who evade paying U.S. taxes by
hiding assets in undisclosed foreign bank accounts. We recognize and affirm the sovereign
right of the U.S. government, as it is of any government, to collect taxes from its citizens. We
also recognize that tax avoidance and tax evasion threaten the already weak revenue
position of many governments.
According to a November 2011 report from the Tax Justice Network, an independent group
that promotes financial transparency, governments worldwide lose more than US$3 trillion in
annual revenue because of tax evasion. This loss is equivalent to more than 5 percent of
global GDP.
The report estimates that the United States is in the unpleasant position of Number One
when it comes to tax evasion. The U.S. government loses some US$377 billion a year from
tax evasion by U.S.-based firms and individuals. To put this sum in perspective, it represents
some 7.5 percent of total U.S. government revenue. In addition, the Euro Zone countries of
Italy, Germany, France and Spain as well as the United Kingdom are estimated to each lose
at least US$100 billion in revenue every year to tax evasion.
Not surprisingly, these five countries have seen an opportunity in FATCA to counter offshore
tax evasion and improve international tax compliance. They have agreed to each enter into
Intergovernmental Agreements with the United States for collecting and reporting
FATCA-style information to their local tax authorities. On September 14 2012, the United
States and the United Kingdom announced they had signed the first bilateral agreement to
implement FATCA.
FATCA and the Caribbean
So, Ladies and Gentlemen, where does this leave the Caribbean?
As you may be aware, tax transparency and the fight against cross-border tax evasion have
been high on the agenda of successive G-20 Summits. At the G-20 Summit held in Los
Cabos, Mexico in June 2012, leaders reiterated their commitment to strengthen transparency
and comprehensive exchange of tax information including through the Global Forum on
Transparency and Exchange of Information for Tax Purposes and through the Multilateral
Convention on Mutual Administrative Assistance. This will be mainly achieved through peer
reviews of countries‟ compliance with internationally agreed tax standards.
It is my respectful view that adopting a robust, common set of standards may be essential to
fostering global financial stability. But it is neither practical nor desirable to effect a dogmatic
application of these identical standards to every country or region. Standards must be
calibrated and adapted to local circumstances. This is particularly true in the Caribbean given
the limitation and vulnerabilities inherent in the relatively small size of individual economies.
For some time now, Caribbean countries have had to grapple with the exercise of the
asymmetrical global application of power and influence when it comes to the increased
regulatory scrutiny by the advanced countries of the region's offshore financial centres,
especially in respect of tax evasion and money laundering. To be fair, some of these
Caribbean jurisdictions did have loosely defined regulatory and supervisory environments,
but have subsequently come a long way in strengthening their capacity.
As an example, I recall 1998, when the Organization for Economic Cooperation and
Development (OECD) produced a list of countries which it said would be "blacklisted" for
"harmful tax competition". Caribbean countries, which were on that list, mounted a spirited
response with the assistance of the Commonwealth Secretariat, forcing the OECD to relax its
position in 2000.
Since then, the global financial crisis and a string of headline-grabbing fraud scandals like
those involving disgraced Wall Street financier Bernard Madoff and Texas billionaire Allen
Stanford have focused new attention on offshore financial centers in the Caribbean.
However, no Caribbean country is currently on the OECD "gray" or "black" list of
non-cooperative jurisdictions.
Now, the Caribbean region has to cope with FATCA. Quite rightfully, the Caribbean
Community (CARICOM), an organization of 15 Caribbean nations and which coordinates
economic policy in the region, is taking the lead on FATCA. CARICOM has created a Task
Force led by Jamaica and has hired the accounting firm of PriceWaterhouseCoopers to
advise on the best approach for the region on the issue. The region's strategic approach to
FATCA will be on the agenda of the upcoming CARICOM Central Bank Governors Meeting
to be held in Suriname in mid-November 2012.
Apart from using the joint regional machinery of the CARICOM Secretariat to advance their
collective interests in FATCA, I would also encourage Caribbean countries to build alliances
with other jurisdictions in the Americas that are equally affected by FATCA.
In particular, I note that the TTSEC, which is the third representative of the Inter-American
Regional Committee (IARC), is in a unique position to make representations on behalf of the
Caribbean to the International Organisation of Securities Commission (IOSCO). I encourage
the TTSEC to use this avenue to highlight FATCA implementation issues that are of
particular concern to the Caribbean region or to members within the region.
As I indicated before, no one country can do this alone. Now is the time for Caribbean
countries to put their case before influential and potential allies in the G-20 such as Brazil
and Canada, which together represent the Caribbean region on the Executive Boards of the
IMF and the World Bank.
I believe that now is also time for the Caribbean to develop a different engagement model
with China. China recently joined the Global Forum to maintain its interests in mainland
China, Hong Kong and Macao. As a Vice President of the Global Forum, China may prove to
be an invaluable ally to the Caribbean on implementation of standards of transparency and
international tax matters, instead of being viewed solely as a non-traditional provider of aid
resources to the region.
Trinidad and Tobago - preparedness for FATCA
Ladies and Gentlemen, I now turn to Trinidad and Tobago's readiness for FATCA. I wish to
state quite categorically that Trinidad and Tobago is not a tax haven. Trinidad and Tobago is
recognized by competent institutions such as the IMF, the World Bank and the Financial
Action Task Force (FATF) as a clean and transparent jurisdiction. We have taken significant
steps to enhance the effectiveness of our jurisdiction in our fight against tax avoidance and
tax evasion.
Indeed, at its Plenary Meeting in Paris just a week ago, FATF agreed to move Trinidad and
Tobago from its list of countries with strategic Anti-Money Laundering and Combating the
Financing of Terrorism (AML/CFT) deficiencies.
Over the past decade, the Central Bank of Trinidad and Tobago has taken measures to
enhance Know Your Customer (KYC) procedures for institutions falling under its purview. We
have issued Guidelines on AML/CFT, which comply with the standards of the FATF and
which eventually formed the basis for new legislation in bringing the country closer to full
compliance.
In this respect, the Central Bank is one of three supervisory authorities responsible for
preventing money laundering and terrorist financing, the other two authorities being the
TTSEC and the Financial Intelligence Unit (FIU).
Trinidad and Tobago is party to 17 Double Taxation Treaties in force, and there are others
awaiting ratification or under negotiation. We signed our first Double Taxation Treaties with
both Norway and Denmark in 1969. Our Double Taxation Treaty with the United States was
signed in 1971. We also have a Tax Information Exchange Agreement (TIEA) with the United
States.
This should make it relatively easier to enter into Intergovernmental Agreements of the model
types proposed by the United States, in which foreign financial institutions report information
to authorities in their residence country and have those foreign authorities report the
information to the IRS.
We recognize that several benefits may arise from concluding a FATCA-style agreement
using the Intergovernmental model. It eliminates U.S. withholding on payments to our
financial institutions; it identifies specific categories of our financial institutions which are
deemed compliant or which present a low risk of tax evasion; it relieves our financial
institutions from terminating the account of a recalcitrant account holder; and it imposes
passthru withholding on payments to other foreign financial institutions in the FATCA treaty
partner or in another jurisdiction with which the U.S. has a FATCA agreement.
Based on submissions, it appears that all of our banks are ready to respond to, and comply
with, FACTA requirements. However, there are varying levels of preparedness within the
banking sector. Our three Canadian and the U.S.-owned banks are at the highest level of
part of their parents‟ global program of FATCA compliance. The
preparedness, having been
two large local banks have initiated projects which would enable them to be well in train to
comply with the FATCA requirements. The smaller banks are in the process of amending
their KYC procedures to identify U.S. residents and citizens.
So, in my respectful view, there is little need for us to be unduly alarmed about FATCA. I do
concede, however, that successful navigation of FATCA would entail a number of challenges
for our financial institutions, including the immediate need to mount an aggressive public
awareness campaign. And, of course, much more work needs to be done by several other
sectors and entities in preparing for FATCA including credit unions, and the Unit Trust
Corporation.
As you can appreciate, ladies and gentlemen, many of the issues surrounding FATCA go
well beyond the remit of the Central Bank. For example, one key issue relates to the capacity
of our Board of Inland Revenue, which would probably be the tax authority designated to
conduct these operations, to cope with the requirements imposed by the proposed FATCA
Partnership.
It is from this perspective that the Central Bank proposes the establishment of a Joint
Working Group of key stakeholders to prepare for FATCA implementation. Among the
proposed terms of reference of the Working Group would be to evaluate the impact of
FATCA on the financial sector in Trinidad and Tobago, to determine a cost-effective strategy
for compliance, and to advise on a promotions strategy.
The Working Group would comprise the Board of Inland Revenue, the Ministry of Finance,
the Ministry of Foreign Affairs, members of the Banking Association of Trinidad and Tobago,
members of the Association of Trinidad and Tobago Insurance Companies (ATTIC),
members of the Institute of Chartered Accountants of Trinidad and Tobago (ICATT), the FIU,
the TTSEC and the Central Bank.
Conclusion
In closing, ladies and gentlemen, we must recognize that the FATCA clock is ticking, but
partnership models for engagement are emerging. Whether Trinidad and Tobago settles
FATCA on the basis of bilateral interventions, or through joint partnership with other
Caribbean countries, we will be forcefully seeking to ensure that financial institutions in
Trinidad and Tobago face no undue disadvantage from FATCA compliance.
I thank you.