The Greens/EFA group in the European Parliament wants the European Union to exert more pressure on the United States: the US should no longer serve as a “tax haven” for European tax dodgers. Proposed measures include blacklisting and a FATCA-type 30% withholding tax on EU-sourced payments.
Two global transparency initiatives are underway that could help tackle financial crimes including tax evasion, money laundering and corruption: registration of beneficial ownership for companies (to identify the real persons owning or controlling such companies) and automatic exchange of bank account information between tax administrations. The European Union has made progress in both respects, with the adoption of a 4th anti-money laundering Directive (in May 2015) and by committing to implement the OECD’s common reporting standard for automatic exchange of financial account information. The United States (U.S.), in contrast, has done neither so far.
On May 5th, 2016 the U.S. announced new measures to improve its financial transparency, although not all the texts of the proposed regulations were provided. The U.S. Treasury announced three new measures: … In any case, not only would some of these new rules require Congress approval, but even the U.S. Treasury final proposals on beneficial ownership collection by financial institutions are not enough to solve all the problems nor to bring the U.S. into line with the OECD’s standard for automatic exchange of information. …
Two main issues in the U.S. affect the global progress towards transparency: … Company registration is regulated by each of the 50 states’ law. In 14 states, companies may be created identifying neither shareholders nor managers. At the federal level, tax rules require filing some information to obtain an Employer Identification Number (EIN). However, not all companies require an EIN and, even if they do, the ‘beneficial owners’ (the actual natural persons owning or controlling the company) are not necessarily among the information to be provided. Companies only have to identify one ‘responsible party’, who may be a nominee director. In order to (partially) address this, the White House 2017 budget proposal and the new measures proposed on May 5th, 2016 suggest requiring all companies (or according to the May 5th proposed rules, at least some foreign-owned disregarded entities, such as single-member limited liability companies) to obtain an EIN. Not only does this proposal need to become effective, but information would apparently still be about the ‘responsible party’ and not necessarily about the real physical person owning and controlling the company (the so-called beneficial owner).
… The U.S. has refused to join the trend for multilateral automatic exchange of information. Instead, it will implement its domestic law called the Foreign Account Tax Compliance Act (FATCA) and the related Inter-Governmental Agreements signed with other countries. However, these involve unequal exchanges of information: the U.S. receives more information than what it sends (for example, about beneficial ownership data). Oddly, though, the OECD did not include the U.S. among jurisdictions that did not commit to its new standard.
Even if the U.S. committed to exchange equal levels of information in the future, the current U.S. legal framework does not allow its financial institutions to collect beneficial ownership information for all relevant cases covered by the OECD’s global automatic exchange of information standard. U.S. financial institutions are currently only required to obtain information on beneficial owners for correspondent banking (i.e. accounts held for foreign financial institutions) and for private banking of non-U.S. clients (accounts holding more than USD 1 million).
Final rules to address these limitations have been announced on May 5th, 2016 although financial institutions must comply with them only by May 11th, 2018. However, the final rules still have the same problems that the IMF identified regarding the 2014 version of the rules so they will not fix all the problems. Remaining shortcomings include: some entities will still not be covered (i.e. insurance companies), the definition of ‘beneficial owner’ is incomplete (it does not include the ‘control through other means’ test, meaning that if you cannot identify at least one person owning 25% or more of the shares, financial institutions should try to find someone who controls the company through other means, before identifying only someone with a managerial position-who may be a nominee director), the verification of information would rely mainly on customer’s own certification, information on beneficial owners would be required for new accounts only (not for existing ones) and it will not need to be updated after the first time of collection, unless the financial institution becomes aware of changes as part of monitoring for risks. In addition, trusts will not be required to provide beneficial ownership information unless they own enough equity in an entity, such as a company, required to provide this information.
To fix this situation and promote equal levels of transparency, this paper provides a series of recommendations. For example, the European Union should consider including the U.S. in the upcoming list of tax havens, unless it effectively ensures registration of beneficial ownership information for companies and commits to equal levels of automatic exchange of information with European Union countries. Ideally, all financial centres should effectively implement the OECD standard for automatic exchange of information (by becoming a party to the OECD Amended Multilateral Tax Convention, signing the Multilateral Competent Authority Agreement and agreeing to exchange information with all other cosignatories). The European Union could thus consider imposing a sanction (such as a 30% withholding tax on all EU-sourced payments) against any financial institution that refuses to automatically exchange information about EU residents holding accounts abroad. In a second stage, sanctions could also be used to ensure that financial institutions from financial centres will also provide information to developing countries with which the European Union is already exchanging information.
