France has signed a bilateral information exchange agreement with the USA, which may well become the model for such exchanges between European countries.
The Foreign Account Tax Compliance Act (FATCA) passed in the United States in March 2010, aims at combatting off-shore tax evasion by US taxpayers.
It requires that banks and financial institutions worldwide identify US account holders amongst their clients, and that they automatically send information to the Internal Revenue Service (IRS) about these accounts.
Banks will be obliged to disclose names and addresses, as well as balances, receipts, and withdrawals.
The main requirements for non-US institutions enters into force on 1 July 2014, prior to which the procedure involves the signing of bilateral agreements with the IRS.
Five European countries, including France and the United Kingdom, have initiated a common system of bilateral cooperation with the United States on the basis of an automatic exchange of tax information.
Accordingly, French and UK banks will now collect data and transmit them to their tax authorities, who in turn will forward to the IRS. The same procedure will apply in reverse, with the IRS providing tax information on French and UK taxpayers holding assets in the United States.
The net is cast wide in terms of the information that is captured by the agreement. It includes most types of income, such as interest, dividends, royalties, bonuses, proceeds of sale, as well as most types of account holders (individuals, companies, and partnerships etc) and financial institutions (banks, insurance companies, dealers, brokers, trusts, and funds).
Failing a bilateral agreement, the US authorities are entitled to apply a withholding tax of 30% on all US source income of foreign financial institutions in the United States.
The implications of this law for foreign financial institutions are huge, and the complexity of the law, coupled with the financial penalties of non-compliance, have led some European banks to drop US customer accounts.
A Model for Europe?
Despite the difficulties over the scale of this agreement for financial institutions, five European countries (France, Germany, Spain, Italy and UK) have sent a letter to the European Commission requesting enhanced cooperation in the automatic exchange of information.
The European Savings Directive already provides for a limited automatic exchange of information between Member States concerning interest earned by EU residents, but it excludes other income.
In 2011 Europe adopted a Directive for enhanced cooperation in the field of direct taxation. National laws, regulations and administrative provisions transposing the text came into force on 1 January 2012, except for the automatic exchange of information, which will enter into force on 1st January 2015 for five categories of income and capital - business income, certain life insurance products, pensions, board meeting attendance fees and property rental income.
On the basis of a report to be submitted by the Commission before 1 July 2017 this list of disclosures could be extended to dividends, capital gains and royalties.