The European Commission is concerned that the Foreign Account Tax
Compliance Act ("FACTA") could impose a
significant compliance burden on EU financial institutions and
investment funds. In a letter to Treasury Secretary Tim Geithner and
IRS Commissioner Douglas Shulman, Commissioner for Taxation Algirdas
Šemeta invited U.S. authorities to engage in a dialogue on how to
best achieve the objectives of the Foreign Account Tax Compliance
Act. In a speech delivered late last year, the Commissioner had said
that the Commission has received complaints that the FATCA
legislation will introduce a very onerous new set of reporting
requirements for EU financial entities which do business in the U.S.
or have U.S.-resident investors on their books.
FATCA is U.S. legislation intended to ensure that U.S.
tax authorities obtain information on investments by U.S. residents
in foreign financial institutions, including European financial
institutions. In this regard it pursues goals similar to those of
the EU Savings Tax Directive which provides for an exchange of
information between tax authorities of EU member states.
The letter to Treasury and the IRS stated that, in
light of the information exchange tools that already exist between
tax administrations, and given the ongoing discussions on extending
the scope of the Savings Tax Directive, the Commission invited the
U.S. authorities to consider synergies to achieve their common goals
in a cost-effective and business-friendly way.
Since the enactment of FATCA, as part of the HIRE Act,
in March of 2010, EU business and financial associations have
expressed concerns about the legislation, in particular the costs of
compliance and penalties that it will entail in case of
non-compliance. The Commission discussed the issue with member
states and obtained their support for an EU-wide approach aimed at
exploring solutions that would ensure that U.S. tax authorities can
obtain the information they require on investments by U.S. residents
in foreign financial institutions without any excessive burden on
the EU financial industry.
The EU Savings Tax Directive, like FATCA, imposes
obligations on financial intermediaries requiring paying agents to
report information on interest income paid to individual investors
to tax authorities. A revision of that Directive, in order to expand
its scope, is at an advance stage. EU tax authorities also exchange
information with each other under the EU Directive on Administrative
Cooperation and with third countries, including the U.S., under
information exchange clauses in bilateral double taxation treaties.
Under FATCA, foreign financial institutions with U.S.
customers and foreign non-financial entities with substantial U.S.
owners must disclose information regarding U.S. taxpayers directly
to the IRS. Failure to disclose information will result in a
requirement on non-U.S. financial intermediaries to withhold a 30%
tax on U.S.-source income. The European financial industry estimates
that the costs of modifying their IT systems and the administrative
burden of ensuring compliance with FATCA would be significant.