Non-U.S. Banks May Be Forced To Sever Ties With US Citizen Clients Because Of FATCA (Part 2 – Notice 2023-11)

Introduction – The Readers’ Digest Version

This is Part 2 of a series of posts discussing the world of FATCA and how IRS Notice 2023-11 is likely to impact it. (Part 1 is referenced in the above tweet.) In Part 1 I described how Notice 2023-11 imposes significant additional obligations on both non-US banks and the IGA Model 1 governments. (This post will be best understood by first reading Part 1 and understanding the additional compliance burdens imposed on non-US banks as a result of Notice 2023-11.) The purpose of this post (Part 2) is to suggest that the overall context of FATCA, the FATCA IGAs and US citizenship taxation will incentivize non-US banks to purge US citizen clients. It is reasonable to conclude, that US citizen clients are a clear and present danger to their businesses.

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The Carrot, The Stick And Heightened FATCA Enforcement On Overseas Americans (Part 1 - Notice 2023-11)

Welcome To 2023 – A Year Of Heightened FATCA Enforcement

On December 30, 2022 US Treasury released Notice 2023-11. The broad purpose of the Notice is to prescribe conditions that would allow non-US banks to temporarily avoid a designation of “significant non-compliance” under the FATCA IGAs. It is important to note that Notice 2023-11 is NOT simply a “stay of execution”. It is a “stay of execution” that is conditional on both non-US banks and their governments participating in a significant escalation of FATCA enforcement on US citizens who live outside the United States.

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Would A Move To Residency-Based Taxation Solve The FATCA Problem For Americans Abroad Created By The FATCA IGAs?

Purpose Of This Post – The “Readers Digest” Version

FATCA is administered through the FATCA IGAs (international agreements) and not through the U.S. Internal Revenue Code (domestic law of the United States). the FATCA IGAs do NOT include a provision to change the meaning of “U.S. Person”. Rather the meaning of “U.S. Person” is permanently defined as a “U.S. citizen or resident”. There is no provision in the IGA to change this definition. Therefore, the IGAs are written so that they will ALWAYS apply to U.S. citizens regardless of whether the U.S. continues citizenship taxation.

In effect, implementing FATCA through the IGAs has had the practical impact that:

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The $50,000 FATCA Question: Are Accounts Less Than $50,000 USD Reportable Under The US Canada IGA?

Part I – What does the $50,000 threshold for FATCA reporting mean in practice?

This post is focused ONLY on accounts held by (1) individuals who (2) are “US Persons” within the meaning of the FATCA IGA who (3) have been identified as “US Persons” and who (4) have been unable to “self-certify” that they are not “US Persons”. There are tens of thousands of US citizens in Canada and other countries that carry on normal banking activities with their “USness” undetected. Their accounts are not being forwarded to the USA.

This post is NOT intended to apply to entity accounts or any other kind of account.

The Context …

As a result of the FATCA IGA, Canadian financial institutions are required to report any accounts owned by “US Persons” to the Canada Revenue Agency. The definitions section of the IGA stipulates that the definition of “US Person” is determined by the US Internal Revenue Code. Therefore, all countries who have signed FATCA IGAs have allowed the United States to define any of their citizens or residents as “US Persons” now and in the future. (I wonder whether this is a reason why China has not signed a FATCA IGA.)

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John Richardson

(This is a continuation of a previous post by John Richardson titled, “Introducing FATCA – What Does It Mean In Your Life?” It gives a great summary of FATCA and leads directly into this article.)

First, About the FATCA legislation …

2012 – The world according to FATCA – For the compliance industry: “The Gift That Just Keeps on Giving.”

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