Four years ago, the global financial system experienced a serious credit challenge. That event had a deleterious impact on a wide swath of the US economy, but was particularly damaging to the real estate and labour markets. Caught in that financial/real estate trap was the investment of a major Caribbean financial services organization, Colonial Life Insurance Company (CLICO). CLICO (Guyana) was ensnared in the debacle stemming from its investment in CLICO Bahamas which was heavily invested in the US real estate market. CLICO (Guyana) ended up being liquidated. As the drama unfolded, the administration of the day ordered that a stress test be performed on the commercial banks in Guyana. The stress test was ordered in an effort to reassure Guyanese that the collapse of CLICO was not about to expose unanticipated weaknesses in the commercial banking sector that could place the commercial banks in crisis. Everything was reported as fine. The Minister of Finance continues to provide that reassurance every year by reporting on the performance of the commercial banks in his annual budget presentation to the National Assembly. If the financial system of Guyana escaped the onslaught of the global financial tsunami of 2008, it might be about to be hit by one of its aftershocks, the implementation of the Foreign Account Tax Compliance Act (FATCA).
The financial crisis also placed into sharper focus the budget deficit of the US as investors became frightened by the prospect of rapid inflation from the massive injection of money by the Federal Reserve Bank and the Federal Government into the economy to stave off an economic depression. With efficiency always on its mind, the US Government tried to kill as many birds as possible with one stone in confronting the economic crisis. In an effort to create jobs and to find the money to pay for the job creation programme, the US Congress adopted House Resolution (HR) 2847 in 2010. Known as the HIRE Act (Hiring Incentives to Restore Employment), the Bill sought to provide incentives to employers who created jobs among other things. In an effort to find money to pay for the job-related provisions of the Bill, the US Government also sought to broaden enforcement efforts against tax evasion by Americans.
Tax evasion was always a concern of the US Government, but the financial crisis precipitated the urgency to widen the areas of focus in search of extra money. It added a new dimension, Chapter 4, to the Internal Revenue Code of 1986 that now has a wider global focus and greater reach into the domestic financial system of other countries. While obviously not thinking about this issue, the Minister of Finance of Guyana was correct in observing in his 2012 budget presentation that “… no matter how small an economy might be or how distant it might appear from the major financial metropolises of the world, the potential domestic consequences of global economic and financial events are always near, given the extent of today’s interconnectedness”.
Like Guyanese, American citizens and permanent residents (green card holders) are required to report their worldwide income on their annual income tax return. This means that income earned inside and outside the country has to be reported on the annual income tax return. It is not clear to what degree this requirement is enforced by the Guyanese authorities, but with the passage of HR 2847 containing the provisions of HR 3933, the FATCA, the US Government is making a greater effort at accessing its share of the worldwide income of its taxpayers. There exists already an expectation among US taxing authority that US persons should voluntarily report income from all sources. As is most often the case, the US pays particular interest to instances where the income exceeds the equivalent of US$10,000. Whenever that happens, persons are required to file Form TD F 90-22.1 as part of their income tax return. Other forms might be required depending on the type of assets held overseas.
What is new about the FATCA is that it brings normally disinterested third parties directly into the picture. In the belief that they are losing billions, the US authorities are no longer relying solely on the integrity of the taxpayer to compute, report and remit any tax liabilities on the worldwide income. It has decided to solicit the assistance of foreign financial institutions and certain non-financial foreign entities to supply it with the information to help force compliance. Some of this third-party reporting has been limited to prominent financial and investment centers, but the US has decided to expand it worldwide to maintain, in its view, fairness in the federal income tax system. As the proposed regulations jointly released in February this year by the US Treasury Department and the Internal Revenue Service (IRS) notes, globalization and improvements in communications have increased investment opportunities for certain types of US taxpayers. In the view of the US Government, some US taxpayers are better placed to take advantage of these investment opportunities, and those who do, are given an edge over US taxpayers who do not have access to the same opportunities. According to the regulations in reference, the law is designed to place every taxpayer on an equal footing.
The interconnectedness among countries increases expectations and obligations of all in the global community. With regard to the FATCA, the expectation is that all foreign financial entities will sign agreements with the US Department of Treasury by June 2013 to report the financial holdings of US taxpayers to the IRS so as to prevent withholding action against them. This makes them information gathering agencies for the US Government. Each financial institution would need to report the name, address, account number, the account balance, gross receipts, gross withdrawals or gross payments and TIN of each account holder which is a specified United States person or a United States owned foreign entity. If they do not, then any financial institution, US or foreign, holding assets for that foreign financial institution or entity, would be required to withhold 30 percent of any eligible payments due to the non-compliant deriving from those assets. The same condition obtains for individuals if they refuse to comply with requests for information from a financial institution with which they do business. This latter provision makes foreign financial institutions tax withholding agents of the US Government.
There are several reasons that the financial institutions and foreign entities in Guyana have to be stressed out over the tax reporting and withholding roles that they are being asked to play. One reason stems from the reporting burden that it imposes on them and the likely costs that will be incurred in their attempt to exercise the required due diligence. A second reason is the impact that it could have on the business model of financial and non-financial institutions seeking to maximize profits. A third reason has to do with corruption and money laundering, and the extent to which some institutions could be implicated unwittingly in such matters. Some countries have cited as a fourth reason the issue of sovereignty. This last reason, as important as it might be, loses value when countries yield much of their economic independence to the global community and they have no viable response to the impact of its actions. As Guyana’s Finance Minister further conceded in his 2012 budget submission “CARICOM member states face the peculiar conundrum that we make such an inordinately small contribution to global outcomes, yet we simultaneously face inordinately high exposure to these very outcomes”. As such, the issue of sovereignty is hardly of importance to this matter and will be set aside in this article.
(To be continued)