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Automatic Exchange of Information (AEoI), Common Reporting Standard (CRS), FATCA
Automatischer Informationsaustausch (AIA)

IRS developed information system

30. Januar 2017
Lesezeit: 5 mins
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The IRS assures that it has developed information system infrastructure, procedures, and data use as well as confidentiality safeguards to protect taxpayer data. The IRS has also stressed that it will only engage in reciprocal exchange with foreign jurisdictions that, among other requirements, meet its stringent safeguard, privacy, and technical standards. Indeed, before exchanging with a particular jurisdiction, the United States conducted detailed reviews of that jurisdiction's laws and infrastructure concerning the use and protection of taxpayer data, cyber-security capabilities, as well as security practices and procedures.

However, critics of FATCA – particularly in the United States – say that the law is not only massively extra-territorial in scope, but also tramples all over an individual's right to privacy and could lead to falling foreign investment in the US. What is more, the US Government has been accused of using FATCA as a sledgehammer to crack a nut, for the Treasury Department estimates that only USD 800m per year in extra tax will be collected under the law – a figure which pales into insignificance compared to the money spent by financial institutions and tax authorities to introduce FATCA.

FATCA has been challenged on a number of fronts, both legislatively in the United States, and via the courts in the US and other countries. One of the most vocal critics is Senator Rand Paul, a Kentucky Republican, who has called FATCA "a textbook case of a bad law." In March 2015, Paul introduced a bill in the Senate to repeal FATCA's "anti-privacy provisions," thereby rendering the law redundant. A similar bill was introduced in the House of Representatives on September 7, 2016, by fellow Republican Mark Meadows (R - North Carolina). Meadows believes that FATCA violates privacy rights guaranteed by the Fourth Amendment of the US Constitution, and his bill would therefore repeal all of FATCA's information reporting and tax withholding requirements. "Ultimately, it is clear that FATCA goes well beyond what is appropriate and requires a level of disclosing information to the IRS that violates Americans' Fourth Amendment rights and places unnecessary burdens on taxpayers," he said.

Senator Paul has been unsuccessful in using the courts to overturn FATCA. In April 2016, the US District Court for the Southern District of Ohio dismissed a case brought by Paul and a group of individuals, who attempted to make several challenges to FATCA and the Report of Foreign Bank and Financial Accounts (FBAR). In their introduction to the case, the plaintiffs stated that the FATCA and FBAR "laws and agreements impose unique and discriminatory burdens on US citizens living and working abroad," and that "the challenged provisions are unconstitutional and the defendants [Treasury, IRS and FinCEN] should be enjoined from enforcing them."

The plaintiffs called IGAs unconstitutional, as they had not been submitted to the US Senate for its advice, consent or approval, while they also "nullify the right of individuals to refuse to waive foreign privacy laws that would otherwise prohibit their banks from disclosing their account information to the IRS." Furthermore, it was noted that the FATCA and FBAR reporting requirements "require US citizens living abroad to report more detailed information about their local bank accounts than US citizens living in the United States." Finally, it was claimed that the 30 percent "tax" imposed by FATCA on payments to foreign FIs when they "choose not to help the IRS pry into the bank accounts of their US customers … is not a tax at all but rather a penalty designed to accomplish indirectly through financial coercion what the US government cannot mandate directly through regulation."

However, the court decided that all of the plaintiffs lacked standing to sue in various ways. In particular, they had failed to establish that they had suffered an injury caused directly by the Treasury, IRS or FinCEN.

Court challenges on foreign soil have also fallen short, including in Canada, where in September 2015, the Federal Court denied a request for an injunction to prevent the collection and disclosure of FATCA information to the United States regarding American citizens living in Canada. While an attempt to block FATCA exchanges by the state of Israel was initially more successful, a later hearing overturned the injunction. Ominously, the judge in the second hearing appeared to suggest that the age of individual privacy was over.

The Israeli lawsuit was initiated by an organization called Republicans Overseas Israel. And it is probably fair to say that, in the US, critics of FATCA have a more sympathetic ear on the Republican side of Congress than the Democratic. Indeed, the Republican Party's agreed at its National Convention in July 2016, saying FATCA and FBAR results in "Government's warrantless seizure of personal financial information without reasonable suspicion or probable cause" and was of the opinion that "FATCA not only allows 'unreasonable search and seizures' but also threatens the ability of overseas Americans to lead normal lives."

Before the presidential election the Republican Party stopped short of pledging to repeal FATCA, and President Trump has not expressed a wish to do so. Thus, while opponents will probably continue in their attempts to repeal or nullify FATCA, their chances of success seemed rather remote. But, President Trump allied with a Congress controlled by Republicans, might improve these chances considerably.

FATCA having effectively gone global and inspiring OECDs Common Reporting Standard, automatic exchange of information seems to be becoming the norm, rather than something exceptional. Still, after one week with Donald Trump as US president, it seems that nothing is impossible.