united-states international tax-law
Is FATCA really reciprocal?
<p>Question is obviously for non-US persons. E.g German living in Germany with a US bank account</p>
<p>FATCA is supposed to be reciprocal but I've seen reports that it is not.</p>
<p><a href="https://www.irs.gov/businesses/corporations/foreign-account-tax-compliance-act-fatca" rel="nofollow noreferrer">https://www.irs.gov/businesses/corporations/foreign-account-tax-compliance-act-fatca</a></p>
<p>Some say FATCA isn't actually reciprocal because US wants to be the best tax haven and attract as foreign capital as it possibly can.</p>
<p>What's true?</p>

<p>FACTA is implemented via bilateral tax treaties with particular countries that have several different main models that are used as templates.</p>
<p>Many countries of the world <a href="https://home.treasury.gov/policy-issues/tax-policy/foreign-account-tax-compliance-act" rel="nofollow noreferrer">have agreed to FACTA treaties with the U.S.</a> (the text of which is available at the link). For example, <a href="https://home.treasury.gov/system/files/131/FATCA-Agreement-Germany-5-31-2013.pdf" rel="nofollow noreferrer">the treaty with Germany</a> clearly creates reciprocal obligations in language including the first part of Section 3. Reports you have seen to the contrary are incorrect, at least insofar as what the U.S. is legally required to do in cases where someone who is a citizen of a country it has a treaty with has an account in the U.S.</p>
<p>I do not know to what extent tax authorities in countries with these treaties, such as Germany, actually utilize their treaty rights, but they have the legal right to do so.</p>
<p>Those treaties (or related pre-existing treaties in some countries that already had tax treaties with the U.S. containing overlapping provisions) afford the non-U.S. countries which are parties to those treaties with reciprocal rights to the rights of the U.S. under the treaty (basically to get information about the accounts of and compel tax withholding from citizens of the other country).</p>
<p><a href="https://us-tax.org/2021/03/18/fatca-11-years-later-us-still-the-tax-haven/" rel="nofollow noreferrer">At least one critic</a> calls FACTA non-reciprocal, but the critic is using the term in a non-standard manner. Both sides have equal legal rights, but many foreign countries choose not to enforce their rights with respect to the U.S. based accounts of their citizens because they don't have an income tax, or their income tax does not extend to U.S. based accounts of their citizens:</p>
<blockquote>
<p>Typically, the country signing a Model 1B IGA has no need for
information about financial accounts of its nationals or residents
since the country imposes no income tax or has only a territorial
income tax.  The United States and the United Arab Emirates (which has
no income tax), for example, have signed a Model 1B IGA
(non-reciprocal). This can clearly be seen by comparing Article 2 of
the Model 1 reciprocal IGA with the one signed by the UAE. The UAE IGA
follows the non-reciprocal IGA Model 1B for countries that do not have
a tax treaty or tax information exchange agreement in place with the
USA. This means that the UAE will send information to the IRS about US
account holders at UAE financial institutions, but the US will not be
sending information about UAE account holders in US financial
institutions to the UAE.  Since the UAE does not impose an income tax,
this information is not needed for tax enforcement.</p>
</blockquote>
<p>While this may be a &quot;bad deal&quot; in isolation for the non-U.S. country to sign because it gets something of less use to it and it is to the U.S., it has the same rights and if it wants to impose a tax on the U.S. account income of its citizens, it may do so and receive U.S. cooperation in getting that information pursuant to its treaty rights.</p>
<p>Also, the quoted discussion overstates the extent to which a country with an income tax that has a territorial taxation basis for its taxes exempts &quot;hot&quot; intangible assets like interest and dividends on financial accounts held by persons domiciled in their country from income taxation.</p>
<p>Many of countries with income taxes treat income intangible assets like financial accounts as domiciled where the owner resides for tax purposes. So, if a French citizen who lives in Paris sets up a bank account at a bank in Chicago, interest on that bank account may still be subject to U.S. taxes, even if interest on that bank account might not be subject to French income taxes if that French citizen lived permanently in Chicago.</p>
<p>It took a while to get intergovernmental agreements in place with foreign countries, so initially, the process didn't work as planned. But as of 2022, a great many countries do have intergovernmental agreements with the U.S. giving them right to access U.S. account information of their nationals if they wish to do so.</p>
<blockquote>
<p>Some say FATCA isn't actually reciprocal because US wants to be the
best tax haven and attract as foreign capital as it possibly can.</p>
</blockquote>
<p>Not really.</p>
<p>Congress passed FATCA in 2010 in an effort to enforce its own tax laws. It wasn't actively trying to be a tax haven or attract foreign capital, and the U.S. states like California and New York that are the centers of U.S. foreign capital investment have laws that are neither particularly asset protection friendly, nor particularly low in taxes.</p>
<p>There are some mostly small, rural states in the U.S. like South Dakota, Alaska and Montana that have tried to position themselves as asset protection havens. But this is limited in effect because U.S. tax law and other aspects of U.S. law limit its desirability for this purpose. Certainly, there is no fair telling of the legislative history of FACTA or of U.S. foreign policy which would suggest that a desire to be foreign tax haven has been an important factor in passing  FACTA or in U.S. international tax treaty development. Simply put, there are just way too many non-U.S. jurisdictions which are far more desirable for those purposes.</p>
