Luxemburger Wort, 31 March 2014
FATCA signature in Luxembourg
Interview of Christian Daws and Patrice Fritsch from EY Luxembourg, by Christian Di Cato from Luxemburger Wort.
On February 27th Luxembourg and the United States have agreed on the new fiscal regulation FATCA. What is FATCA?
Christian Daws: FATCA stands for Foreign Account Tax Compliance Act. The purpose of the FATCA provisions is for the US authorities to be able to collect information concerning US persons investing outside the United States or through entities that are outside the United States in order to ensure that they pay whatever taxes that they owe as US citizens or US residents in the United States. The way it works is that the rules create an obligation for financial entities to report certain information (directly or indirectly) to the US authorities, mostly concerning these US persons they deal with and who have invested through them or otherwise invested abroad.
Are only US american nationals concerned?
Daws: US citizens and persons resident in US. Both are taxpayers in US, both are covered by the US income tax law. And many US entities too.
Patrice Fritsch: However in the context of FATCA the definition of US persons is very wide. By default every account holder that is insufficiently documented or has „US indicia“ is considered as a US person as long as it is not proven that the person is not a US person. FATCA actually puts in place a participating system that obliges the financial institutions to participate otherwise the financial entity may be considered as non participating and disregarded from part of its counterparties.
A simple example would be if the documentation of an account holder is insufficient for FATCA purposes, this account will have to be reported as if it were a US account until it does provide the information that proves that it is not a US account. The incentive is to eliminate possibilities for US persons to invest abroad or through entities that are outside of the US and remain invisible to the US authorities. The FATCA regulation thus obliges all (foreign) financial institutions to participate. The definition of financial insitution is also very broad and includes not only banks and custodians, but also other investment entities such as investment funds, trusts or certain wealth management structures.
Luxembourg has decided to adopt IGA model 1. What are the advantages of model 1 compared to model 2?
Fritsch: Two IGA (Intergovernmental Agreement) models exist. According to IGA model 1, that Luxembourg is going to implement, the reporting will be performed via the tax administration of the country. For in Luxembourg domiciled financial institutions it will be the Luxembourg tax administration, l'Administration des contributions directes. Financial Insitutions can use existing local standard channels to report to the national tax administration that will then provide the information to the IRS. As a difference, in case of IGA model 2, the reporting wwould be performed directly by the financial institutions to the Internal Revenue Service (IRS). Other advantages exist for the IGA Model 1 such as the fact that financial institutions do not have to finalize direct contracts with the IRS as this one is ensured between governments in IGA Model 1.
Will there be a considerable tax revenue loss for Luxembourg?
Fritsch: There is no direct impact in the collection of taxes for Luxembourg. FATCA impacts US persons that need to comply with their declarative obligations in the US. However we can expect that there are high costs for the financial insitutions and the tax administration to implement the requirements and the new processes related to FATCA.
Daws: These are operating costs that are not covered by any new taxes. Others costs are the (re-)training of the staff of the tax administration and the financial institutions. The staff of the tax administration and the financial institutions has to cope with a whole set of new rules: the staff has to be able to apply the additional identification and authentification rules, to run the system for collecting, checking and forwarding the relevant information to the IRS.
Is FATCA a stepping stone in a general trend towards more transparency. Has the financial crisis of 2008 triggered or accelerated this trend?
Daws: FATCA is a US legislation that has been enacted in 2010. With the crisis and the significant investments that the US government was making to support the economy and the massive public debt, the US governement did use the ability to collect more information concerning US taxpayers and to make sure that US taxpayers that owed any taxes were actually paying their taxes. The US governement used that as one of the arguments to be able to reinforce collection of US taxes from US taxpayers.
Fritsch: It is a civic obligation to comply with local tax law. Nevertheless, tax transparency is a global increasing trend and will continue developping over the coming months and years. As a result, Financial Insitutions should focus on ways of synergies between the different regulations in order to be more flexible and implement these regulations in shorter and easier projects.
Daws: There is a perceived need to ensure that taxpaying is equitable, everybody that has to pay taxes should pay their taxes, and of course it may be even more so in times of crisis, there is a more of a perceived need to make sure that the measures that are taken are equitable and that everybody is paying their share.
I thank you for this very interesting interview.
Download and read this article in German (pdf, 190kb).