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Policy Initiative Spotlight: The Global Squeeze on Tax Cheats

by Jonathan Masters
February 27, 2013

Logo of Swiss bank UBS is seen on a building in Zurich (Michael Buholzer/Courtesy Reuters). Logo of Swiss bank UBS is seen on a building in Zurich (Michael Buholzer/Courtesy Reuters).


Midnight. A fishing trawler lurches violently in a squall off the coast of Marseille. A seemingly lifeless body is spotted adrift off the bow, and fished out of the roiling sea. No identification. No memory. Only three enigmatic clues bizarrely implanted in the man’s hip: 000-7-17-12-0-14-26. Gemeinschaft Bank. Zurich.

As Robert Ludlum illustrates so well in the opening scene of The Bourne Identity, few things convey a greater sense of mystery and international intrigue than a numbered Swiss bank account. But to the chagrin of the next generation of spy novelists, the potency of this enduring icon of secrecy may be fading with the expansion of a new initiative known as the Foreign Account Tax Compliance Act.

Enacted in 2010, the legislation requires foreign financial institutions to notify the IRS about offshore accounts of U.S. taxpayers worth more than $50,000. The bill was passed in the wake of the 2009 UBS scandal, in which the Swiss banking giant admitted to conspiring to defraud Uncle Sam of millions of dollars, and helping their clients hide foreign accounts. The bank eventually agreed to divulge the identities of potential U.S. tax cheats and pay $780 million to settle with federal authorities.

U.S. taxpayers are required to pay taxes on all income earned worldwide, and must report foreign accounts if, at any time during the calendar year, the value tops $10,000. While there are significant penalties for non-disclosure, including a fine up to 50 percent of the account value, many taxpayers keep these finances in the dark. The non-partisan Congressional Research Service estimates that individual tax evasion costs the government some $40 billion to $70 billion annually—enough to cover the annual budgets of the Treasury and Commerce Departments combined. FATCA’s reporting regime hopes to bring many of these foreign accounts into the daylight.

This month, the Swiss government became the latest of a handful of FATCA signatories, part of a robust campaign by the Obama administration to create an international network of over 50 nations combating tax evasion. Beginning January of next year, the Treasury Department will start enforcing the law and issuing stiff penalties to individuals and firms in non-compliance. Institutions unwilling to conform face a ban from U.S. securities markets.

“The real story here is that it looks like it is going to become a global model,” Manal Corwin, deputy assistant Treasury secretary for international tax affairs, told Reuters in an interview earlier this year. Additional bilateral agreements with major economies like Japan, France, Germany, Canada and many others are in the pipeline. Even China, which has publicly criticized the initiative, is reportedly in talks with Washington behind closed doors.

However, FATCA has been criticized by some companies and U.S. allies as an overly burdensome and potentially futile crusade. Some large foreign financial institutions may be forced to dole out more than $250 million to comply with the law in the near term, although estimates vary widely. Other critics contend that FATCA will inevitably bear little fruit unless all global tax jurisdictions, particularly well-known tax havens like those in the Caribbean, are brought into the fold—a seemingly unlikely event.

There are also significant privacy concerns. Treasury has acknowledged that reciprocity is a central component of FATCA, where automatic information-sharing between participating countries will be the rule. The IRS already supplies taxpayer information to some partner nations, but critics are concerned about the expansion of this to regions with potential governance issues, such as Latin America. U.S. officials counter that each nation’s respective tax agency is carefully vetted before deals are penned.

At the international level, at least among the world’s wealthiest nations, the idea seems to be gaining traction. “I warmly welcome the co-operative and multilateral approach on which [FATCA] is based,” noted OECD Secretary-General Angel Gurría last November. “We at the OECD have always stressed the need to combat offshore tax evasion while keeping compliance costs as low as possible. A proliferation of different systems is in nobody’s interest.”

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  • Posted by Anna Falcone

    This article seems to miss the point that US Persons living abroad are going to be subject to double taxation on the very bank accounts they use to meet ordinary expenses. Many banks are signing the FATCA with a sigh, then denying banking services to US Persons who are mainly ordinary citizens in the service or intellectual professions, not the offshore revenue hiders that FATCA assumes that overseas residents are. The law treats all who have not declared – even if they didn’t know they had to ! – as tax cheats and criminals. People with joint accounts with a non-US spouse must declare those account, leading to discord and problems within couples. FATCA is “the worst law that nobody has ever heard of”. Why doesn’t the Council consult with US citizens abroad who are penalized for having ordinary non speculative savings in the countries in which they reside, work and raise families???

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