Introduction – The Readers’ Digest Version

Why non-US banks, US citizens living outside the USA and the countries where they live can expect heightened FATCA enforcement in 2023: "The Carrot, The Stick And #FATCA Enforcement On #AmericansAbroad (Part 1 – Notice 2023-11)" |https://t.co/6UDsVYIxMK

— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) January 5, 2023

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. 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.

The “Original Sin” Of Citizenship Taxation

The US Internal Revenue Code:

1. Imposes worldwide taxation on US citizens who do not live in the United States and live in other countries; and

2. The US confers US citizenship on any person born in the United States.

It is estimated that the number of US citizens living outside the United States lies between five million and nine million. The vast majority are certainly also tax residents of the countries where they actually live. Because they are US citizens they are also tax residents of the United States.

Therefore, the effect of and only contextual meaning of US citizenship taxation is that the United States imposes worldwide taxation, according to US tax rules, on the income of individuals who live outside the United States and are tax residents of other countries. Specifically, this means the United States imposes taxation on the non-US source income of tax residents of other countries.

What is clear is that an identification document that reveals a US place of birth means trouble for that individual. They will certainly have difficulty securing and maintaining banking arrangements if they are identified as being a US citizen. I am unaware of any other country in the history of the world that has deliberately depreciated the value of its citizenship.

In General: FATCA is a US law of extra-territorial application which imposes significant substantive and procedural obligations on financial institutions outside the United States. It also imposes significant reporting obligations on individual US citizens living outside the United States. FATCA has had the effect of expanding the US tax base into non-US countries. FATCA (providing the justification for the US to not join the CRS) has created conditions for the US to become the biggest tax haven in the world. FATCA is a US extra-territorial law designed to override the domestic law of other countries. To be clear all of these conditions are the result of Chapter 4 of the Internal Revenue Code, the Treasury regulations made pursuant to the Code and the FATCA IGAs.

More specifically: FATCA is intended to apply to financial institutions outside the United States and regulate their interaction with any US citizen clients. By implementing FATCA through the FATCA IGAs the United States has caused all FATCA partner countries to single out US citizens for intentional differential treatment with respect to the availability of financial accounts. Notably, this citizenship-based discrimination has been enshrined into the law of other countries and exists independently of the US Internal Revenue Code. The predictable result is that certain US citizens, who live in other countries, experience difficulties accessing and/or maintaining bank accounts outside the United States. The “lock out” effect is experienced most acutely by US citizens who live outside the United States and are tax residents of other countries. To put it simply: FATCA interferes with the ability of US citizens living outside the United States to have bank accounts in their country of residence.

Treasury has the statutory authority to exempt banks and countries from FATCA:

1471(b)(2)(B) of the Internal Revenue Code grants Treasury the clear and specific statutory authority to exempt various financial institutions from compliance with FATCA. The specific language authorizing the exemption from FATCA is:

(2) Financial institutions deemed to meet requirements in certain cases

A foreign financial institution may be treated by the Secretary as meeting the requirements of this subsection if—
(A)such institution—

(i)complies with such procedures as the Secretary may prescribe to ensure that such institution does not maintain United States accounts, and
(ii)meets such other requirements as the Secretary may prescribe with respect to accounts of other foreign financial institutions maintained by such institution, or

(B)such institution is a member of a class of institutions with respect to which the Secretary has determined that the application of this section is not necessary to carry out the purposes of this section.

For example Treasury has the authority to exempt banks in specific countries, subsets of banks in different countries or any combination.

From the perspective of non-US banks:

For financial institutions outside the United States, US citizen customers require extra compliance, extra cost and subjects the financial institution to the risk of sanctions and penalties inflicted by and from the United States. The FATCA story began on March 18, 2010. Since that time FATCA (and the attempt to implement it via the FATCA IGAs) has caused nothing but trouble for financial institutions outside the United States and US citizens living outside the United States.

The consequences of “significant non-compliance” and non-US banks

If a non-US bank is in “significant non-compliance” the bank will be deemed to NOT be in compliance with its FATCA obligations and (among other things) it would be REQUIRED to close the account of the “recalcitrant” US citizen. The failure to provide the SSN of US citizen customers would cause “significant non-compliance”. (Note that the FATCA IGAs do not and cannot force a bank to retain a US citizen as a customer.) Therefore, from the perspective of certain US citizens living in Europe, there is/was fear that some non-US banks would simply close the bank accounts of those US citizens who were unable or unwilling to provide the bank with a US SSN by the December 31, 2022 deadline.

December 2022 – Three announcements from the Biden Treasury

The month of December 2022 was a month of unusually intense activity which reinforced the problems of US citizenship taxation and FATCA.

1. December 5, 2022 – The US and Argentina entered a standard Model 1 FATCA IGA which confirms that the current FATCA climate is intended to continue.

2. December 17, 2022 – The US and Croatia entered into a tax treaty based on the 2016 US Model Tax Treaty. The treaty confirms the intention of the United States to impose US taxation on residents of Croatia who are US citizens. In addition, The treaty marked the first inclusion of a “saving clause” that allows (but does not at present require) the United States to impose taxation on “former” AKA renounced US citizens.

3. December 30, 2022 – US Treasury released Notice 2023-13 which (1) reconfirmed the intent of Treasury to impose US taxation on the non-US source income of US citizens who do not live in the United States and (2) requires both non-US banks and the countries where they do business to increase awareness of FATCA and US citizenship tax. Notice 2023-11 appears to assume the US view that it has the sole right to set the terms under which banks, outside the United States, in FATCA partner countries, will be deemed to be in “significant non-compliance” (and therefore subject to sanctions) under the FATCA IGAs. A short description of the details of Notice 2023-11 is available here.

The collective message from December 2022

Notice 2023-11 suggests that the best, safest and most reasonable way for FFIs (“non-US financial institutions”) to avoid “significant non-compliance” with its FATCA obligations (and the associated sanctions) is to purge themselves (subject to any possible limitations of local law) of ALL US citizen clients. To be clear, cutting ties with individual US citizens is the clear result of US laws and regulations that reflect the indifference that the United States has for is citizens who live outside the United States.

After almost 13 years, Notice 2023-11 confirms that the United States has no intention of recognizing its great FATCA mistake and no intention of ending its policy of imposing taxation, reporting and penalties on the non-US source income received by US citizens living outside the United States. I emphasize that US Treasury has the regulatory authority to effect the changes necessary to solve the problems of FATCA and citizenship taxation. It has simply chosen to NOT exercise that authority.

Conclusion: The only way that non-US banks can ensure that they will not be deemed to be in “significant non-compliance” under the FATCA IGAs is for them to neither accept new US citizen clients nor continue to do business with existing US citizen clients. It is unreasonable for non-US banks to continue to live with the risk of penalties and uncertainty that any association with US citizens implies. Non-US banks are deserving of considerable credit for having navigated FATCA as long as they have. Notice 2023-11 is the “straw that broke the camel’s back” because it confirms that, at best, the banks may receive temporary “stays of execution”, but will never be free of the uncertainty and risk associated with having US citizen clients. The blame for this lies clearly and solely on US Treasury.

This is indeed unfortunate for US citizens who live outside the United States. They are faced with the choice of whether to remain a US citizen and NOT have access to financial services in their country of residence or to renounce US citizenship so that they have the rights, freedoms and opportunities available to citizens of every other country in the world.

Renouncing US Citizenship: Those US citizens who believe they require bank accounts in their country of residence are (at present) “free” to renounce their US citizenship. That said, renunciation is is not “free” and costs $2350 USD and the possibility of being subjected the IRC 877A Expatriation Tax. (Perhaps countries with large populations of US citizens might negotiate agreements with the United States to simply “buy” those US citizens from the United States. This might result in the twin benefits of lower costs of severing US citizenship for individuals and the benefits to the host country of ridding the country of the problem of US citizens eroding their tax base.)

Remaining A US Citizen: It occurs to me that Americans abroad could lobby US Treasury to create a new bank for and only for Americans abroad. The bank could be called “FATCA Bank And Trust” and would be specifically designed to to provide financial services for Americans abroad. This way they could exist outside the United States, be monitored 24-7, be able to apply for mortgages in US dollars (no more phantom gains problems), purchase US mutual funds (no more PFICS), create US corporations (no more CFC and GILTI problems). In addition it would solve the problems of FBAR and FATCA Form 8938. No more “foreign accounts” means no more penalty laden reporting. US citizens abroad would no longer need or be permitted to hold bank non-US bank accounts in their country of residence. The accounts would come with a pre-populated “form” where the US citizen would certify under penalties of perjury that he/she had no “foreign” depository, custodial or insurance policies. Provisions would needed to require US citizens with “alien spouses” to provide full reporting of family finances and the extent to which the US citizen may have benefitted from income earned by the alien spouse.

If the US Government is going to continue to create conditions that makes it impossible for non-US banks to have US citizen customers, it would make sense for Treasury to provide for alternative financial services. Of course, the obvious solution would be for the US to end its extra-territorial tax regime. But, why let common sense prevail?

John Richardson – Follow me on Twitter @Expatriationlaw