Innovations in the War on Tax Evasion

ABSTRACTOffshore tax evasion is a global problem that requires a global solution. Nevertheless, the United States unilaterally responded to the offshore tax evasion problem by enacting the Foreign Account Tax Compliance Act. FATCA requires foreign banks to report information about financial accounts held by U.S. taxpayers directly to the Internal Revenue Service and imposes a thirty percent withholding tax on certain U.S. payments to any bank that will not cooperate. Yet, U.S. banks were not required to report any information on nonresident account holders (except for Canadians) to anyone.FATCA garnered worldwide attention. The European Union expressed its concerns to the U.S. Treasury about the compliance burden on the financial industry and the conflict with EU Member States' laws on privacy and data protection. Treasury is resolving these issues by negotiating bilateral agreements known as Intergovernmental Agreements (IGAs) that will require reciprocity on the part of the United States in the exchange of information. These IGAs are furthering the movement toward global transparency as most FATCA partner jurisdictions intend to require reporting on all nonresident accounts rather than just U.S. accounts. This could lead to the development of a multilateral platform for the exchange of information that is critical to combating offshore tax evasion.This Article urges the United States to adopt the regulations and legislation that are necessary before the United States can provide its FATCA partners with the same information that they have been asked to give the U.S. government. The United States should play a leadership role in furthering global transparency and take the steps required to no longer function as a tax haven for tax evaders from other countries. The IGA with Mexico that entered into force on January 1, 2013, is an appropriate vehicle for the United States to demonstrate this renewed commitment to the exchange of information.I. INTRODUCTIONOffshore tax evasion is a global problem.1 It requires a global solution. Nevertheless, the United States chose a unilateral response to the offshore tax evasion problem that could no longer be ignored after the Swiss bank UBS scandal. The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 as part of the Hiring Incentives to Restore Employment Act2 and essentially enlists foreign financial institutions to report directly to the Internal Revenue Service (IRS) certain information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.3 Failure to do so will result in a withholding tax on a variety of payments from the United States to these nonparticipating financial institutions.4This garnered worldwide attention. A letter from the European Union to the IRS and U.S. Treasury expressed concerns about the compliance burden on the EU financial industry and the potential conflict with the various EU Member States' laws on privacy and data protection.5 The European Union Savings Directive took effect in the Member States in 2005 and inter alia enables Member States' tax administrations to automatically exchange information on an individual's interest income.6 Given the European Unions' initiatives in information exchange, the European Commission had hopes of negotiating an EU-wide accommodation.In a speech on January 24, 2012, before the New York State Bar Association, Acting Assistant Treasury Secretary McMahon acknowledged that some countries face legal impediments to complying with the requirement to report account holder information directly to the IRS.7 For example, the German Banking Industry Committee pointed out several areas of potential legal conflicts such as national data protection laws conflicting with FATCA requirements and national public and/or civil laws conflicting with the requirements to terminate certain customer relationships. …