Establishing Same Country Exemption Through Legislation

John Richardson

The Maloney Approach

This is a continuation from a previous article, FATCA’s Same Country Exemption Won’t Work.

On April 25, 2017 Congresswoman Maloney introduced H.R. 2136: “To amend the Internal Revenue Code of 1986 to provide an exception from certain reporting requirements with respect to the foreign accounts of individuals who live abroad.”

The purpose of the Bill is two-fold.

First, to remove the requirement that the accounts of “Americans Abroad” be treated as “U.S. accounts” for the purposes of requiring foreign banks to report on accounts under Internal Revenue Code 1471 (FATCA); and

Second, to remove the requirement that Americans Abroad report certain “foreign bank accounts” pursuant to Internal Revenue Code 6038D (Form 8938).

In other words, the Maloney Bill is to exempt certain foreign accounts held by Americans abroad from FATCA reporting.

The full text of the Bill (which is surprisingly short) is here.

The Maloney bill appears to be an attempt to achieve the legislatively what Americans Citizens Abroad (representing a coalition of groups) attempted to achieve by regulation. The ACA (“American Citizens Abroad”) proposal – commonly referred to as FATCA “Same Country Exemption” or “Ugly American Exemption“- was ultimately rejected by the Obama Treasury which recognized that the possibility of the day-to-day accounts of Americans abroad, being used for tax evasion, was simply too great.

Section 1 – FATCA Face 1 – Exempting the Foreign Financial Institution

Three requirements must be met:

(i) The Foreign Financial Institution can elect to opt out of FATCA “Same Country Exemption”

(ii) The exemption applies ONLY to “depository accounts” which are defined in Treasury Regulation 1.1471-5 to mean:

(3)Definitions. The following definitions apply for purposes of chapter 4 –

(i)Depository account –

(A)In general. Except as otherwise provided in this paragraph (b)(3)(i), the term depository account means any account that is –

(1) A commercial, checking, savings, time, or thrift account, or an account that is evidenced by a certificate of deposit, thrift certificate, investment certificate, passbook, certificate of indebtedness, or any other instrument for placing money in the custody of an entity engaged in a banking or similar business for which such institution is obligated to give credit (regardless of whether such instrument is interest bearing or non-interest bearing), including, for example, a credit balance with respect to a credit card account issued by a credit card company that is engaged in a banking or similar business; or

(2) Any amount held by an insurance company under a guaranteed investment contract or under a similar agreement to pay or credit interest thereon or to return the amount held.

Note that “Depository accounts” are very basic bank accounts. “Custodial accounts” are NOT included in this definition.

(iii) The 911 Test Must Be Satisfied: The “American Abroad” must meet the “residence” requirements specified in Internal Revenue Code 911, which would support eligibility for the Foreign Earned Income Exclusion. The relevant part of S. 911 reads as follows:

(d) Definitions and special rules For purposes of this section—

(1) Qualified individual The term “qualified individual” means an individual whose tax home is in a foreign country and who is—

(A) a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or

(B) a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period.

Note that a person with an “abode” in the United States will NOT satisfy the “bona fide” residence test!

Who decides “whether” the 911 test has been satisfied? How is the determination made?

The mechanism for this will almost certainly have to be mandated by regulation. Is the decision to be made by the bank? Is the decision to be made by the IRS? Is the decision to be made by he individual? The devil is in the details. This process will NOT be welcomed by Foreign Financial Institutions!

Section 2 – FATCA Face 2 – Exempting the American Abroad From Form 8938 Reporting

Once again we see eligibility conditioned on meeting the 911 test.

Q. The Maloney Bill is short. How would the Maloney Bill Work In Practice?

A. It would require more regulations (rules and forms) from U.S. Treasury.

The Internal Revenue Code gives the Secretary broad authority to make regulations to achieve the purposes of FATCA. (For example see Treasury Regulation 1.1471 which provides the definition of “depository account”.) The ACA “Same Country Exemption” proposal was attempt to encourage Treasury to provide relief for Americans Abroad by regulation.

Prognosis – Can The Maloney Bill Work?

FATCA Country Exemption, whether created through legislation (Maloney) or regulation (ACA) depends on cooperation from the Foreign Banks who have already been abused by the United States.

My prediction: The Foreign Banks will simply NOT (as is their right) participate. It is simply to risky to have “U.S. citizen” clients. In fact, it’s probably better to NOT even allow a U.S. citizen to enter the bank!

Speaking of the inevitability of regulations

Could it be that the contents of the “American Citizens Abroad” SCE, will be enacted as “regulations” to support the Maloney bill? It wouldn’t surprise me. Stay tuned!

Appendix

The following is one from a series of comments discussing the Maloney bill at the Isaac Brock Society:

To me, the idea that the SCE would encourage FFIs currently not doing business with US citizens to change their stance is laughable. In the UK, about 40-50% of online brokers have blanket bans on US citizens. If the real issue was the reportability of the account, you would see at least some online brokers refusing to offer reportable accounts but offering non-reportable accounts (eg ISAs). I didn’t find any online brokers that offered non-reportable accounts when they didn’t offer reportable accounts. To me this suggests that the issue driving whether or not they service US citizen customers is not the reportability per se, but rather the risk that a single incorrectly reported account can put them on the non-compliant list.

That risk is not insignificant and for most FFIs would be devastating. Through FATCA, the US has given itself enormous power over the global financial system and the US has the “right” and the ability to inflict, at a minimum, grave financial harm if not bankruptcy if they so desire on any FFI in the world if they serve US citizen customers. FFIs are generally investing customer assets not their own and “withholding” 30% of the interest income, dividend income, proceeds of sale or redemption of principal on their customer assets will create an enormous liability vis a vis their customers that the FFI’s equity will be unable to cover or only temporarily. Furthermore, FATCA is designed to isolate any FFI deemed non-compliant by forcing all compliant FFIs to report every transaction with a non-compliant FFI. A non-compliant FFI is likely to see a) no compliant FFI willing to do business with them b) all customers with US invested assets leave them for a compliant FFI and c) an enormous liability to replace “withheld” customer income and assets. I’m also not aware of any mechanism whereby the FFI can reclaim the “withholding”. If true, then it’s a system to steal the underlying customer assets of non-compliant FFIs.

Now, which FFI having previously decided the systemic risk of having US citizen customers was too great and having seen the US treat FFIs like piggy banks to break in case of emergency, would like to place their neck in the guillotine and offer same country exception accounts by introducing new procedures to verify customer residency? Anyone? Bueller? Yeah, I didn’t think so.

The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a Toronto based lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.

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