Wealthy investors with cross-border holdings are likely to become pawns in a political information war between tax authorities in the US and Europe.
Hot on the heels of announcement about multinational cooperation over the proposed US Foreign Account Tax Compliance Act (FATCA) with the UK, France, Spain, Italy and Germany, officials in Berlin are threatening to pull the plug on FATCA compliance if the Internal Revenue Service (IRS) fails to feed the German tax authorities information about taxpayer holdings with US financial institutions.
Germany is holding out for full reciprocation, even though lawmakers in Washington are trying to cancel a new law that makes US financial institutions supply the data.
“These agreements are crucial,” said James Jatras, of Squire Sanders Public Advocacy, a US government media relations partner.
“The only way Berlin can see going forward with domestic enforcement of the US requests for FATCA information is to have it on a reciprocal basis.
“I don’t know why that’s so important to them, but they insist it’s important. If that reciprocity collapses on the US side, I’m told the Germans will say ‘no, we can’t do this’.”
Angela Foyle, tax and financial services specialist at London consultancy BDO, explained it is “crystal clear” that Germany expects a two-way information feed for putting the FATCA framework in place.
“So FATCA normal, as opposed to FATCA under the intergovernmental agreement, would become mutual cooperation assistance and reciprocity of reporting obligations,” she said.
“Germany was one of the prime movers behind the changes to the EU savings directive for that very reason”
Martin Schulte, of the Association of Foreign Banks in Germany, agrees information exchange is important if Germany stays inside an intergovernmental FATCA agreement.
“The reciprocity is one of the key issues for the German government,” he said. “Although I don’t think the German Treasury expects there are too many German citizens hiding in non-transparent vehicles in the US, reciprocity is a matter of principle – like a balance of power and ‘we’re not just following the US wherever they go: if they want something from us, we want something back’.”