Jump to ContentJump to Main Navigation
The Hypocritical HegemonHow the United States Shapes Global Rules against Tax Evasion and Avoidance$

Lukas Hakelberg

Print publication date: 2020

Print ISBN-13: 9781501748011

Published to Cornell Scholarship Online: September 2020

DOI: 10.7591/cornell/9781501748011.001.0001

Show Summary Details
Page of

PRINTED FROM Cornell University Press SCHOLARSHIP ONLINE (www.cornell.universitypressscholarship.com). (c) Copyright University of Cornell University Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in Cornell for personal use. date: 28 September 2021

The Emergence of Multilateral AEI

The Emergence of Multilateral AEI

Chapter:
(p.82) 5 The Emergence of Multilateral AEI
Source:
The Hypocritical Hegemon
Author(s):

Lukas Hakelberg

Publisher:
Cornell University Press
DOI:10.7591/cornell/9781501748011.003.0005

Abstract and Keywords

This chapter explains that the Foreign Account Tax Compliance Act (FATCA) has its origins in the longstanding efforts of anti-tax haven activists within the Democratic Party. These activists utilized testimony from a whistleblower and a former Union Bank of Switzerland (UBS) private banker to prepare a report on the bank's illegal offshore business with US clients. To increase publicity, they held a corresponding Senate hearing, which eventually triggered the UBS scandal. Shortly afterward, Barack Obama entered office. The scandal, his cordial relationship with Democratic anti-tax haven activists, and personal interest in the issue made combating tax evasion and avoidance a top priority for his administration. In contrast to proposed anti-avoidance measures potentially affecting US multinationals, legislation requesting more transparency from foreign banks serving US clients easily passed Congress. The result was FATCA, a law threatening foreign financial institutions unwilling to report account data of US clients with a 30 percent withholding tax on payments from US sources.

Keywords:   FATCA, Obama administration, Union Bank of Switzerland, anti-tax haven activists, foreign banks, foreign financial institutions, foreign financial institutions, tax evasion, tax avoidance

The Obama administration’s Foreign Account Tax Compliance Act (FATCA) decisively changed bargaining over more financial transparency (Grinberg 2012; Palan and Wigan 2014). Before the act, secrecy jurisdictions usually refused to provide administrative assistance to foreign tax authorities. Soon after the act’s passage, these jurisdictions suddenly agreed to automatically provide data on the accounts of nonresidents on a multilateral basis. Yet analysts still disagree on the factors enabling the act’s passage and the mechanisms through which concessions granted to the United States obliged secrecy jurisdictions to also offer greater cooperation to the rest of the world. While some claim that the financial crisis created an important window of opportunity for measures against secrecy jurisdictions (Eccleston and Gray 2014), others point to the UBS scandal as the decisive catalyst for enhanced tax cooperation (Emmenegger 2017). As to the transmission mechanism, some approaches stress the importance of normative pressure exerted by the Group of 20 (G20) and the Organisation for Economic Co-operation and Development (OECD). After the passage of FATCA, these organizations declared automatic exchange of information (AEI) the new global standard for tax cooperation and threatened noncompliant countries with blacklisting (Eggenberger and Emmenegger 2015). Others interpret concessions to the United States as focal points enabling third states to better coordinate their efforts against secrecy jurisdictions (Emmenegger 2017).

This chapter will demonstrate that FATCA has its origins in the longstanding efforts of anti–tax haven activists within the Democratic Party. These activists utilized testimony from a whistleblower and former UBS private banker to prepare (p.83) a report on the bank’s illegal offshore business with US clients. To increase publicity, they held a corresponding Senate hearing, which eventually triggered the UBS scandal. Shortly afterward, Barack Obama entered office. The scandal, his cordial relationship with Democratic anti–tax haven activists, and personal interest in the issue made combating tax evasion and avoidance a top priority for his administration. In contrast to proposed anti-avoidance measures potentially affecting US multinationals, legislation requesting more transparency from foreign banks serving US clients easily passed Congress. The result was FATCA, a law threatening foreign financial institutions (FFI) unwilling to report account data of US clients with a 30 percent withholding tax on payments from US sources. The act changed international bargaining over information exchange via two channels. By forcing secrecy jurisdictions to enter into AEI agreements with the United States, FATCA activated a most-favored-nation clause obliging EU members to grant greater cooperation offered to a third country also to one another. In addition, the principle of AEI contained in FATCA preempted Swiss attempts at promoting anonymity-preserving withholding agreements as the international standard. Faced with the prospect of applying AEI to US clients and different withholding regimes to other nationalities, even Swiss banks eventually realized that a single global standard, although it meant more transparency, was less costly for them. Eventually, the United States exploited widespread compliance with AEI by refusing to participate itself. Therefore, the country currently enjoys an almost exclusive competitive advantage in the attraction of hidden capital.

The Obama Administration’s Tax Policy Agenda

The Bush tax cuts of 2001 and 2003, and the resulting spike in income inequality, made tax justice an important theme for Democratic presidential candidates ahead of the 2008 elections. During the Democratic primaries, Hillary Clinton (2007a, 2007b) regularly referred to “the President’s reckless tax cuts for those at the top” in her campaign speeches. Likewise, John Edwards (2007) argued “our tax system has been rewritten by George Bush to favor the wealthy and shift the burden to working families.” The candidate putting most emphasis on this issue, however, was Barack Obama (2007), who devoted an entire keynote speech to “tax fairness for the middle class” in September 2007. In that speech, he identified “a successful strategy [by special interests] to ride anti-tax sentiment in this country toward tax cuts that favor wealth, not work,” linking that strategy to increasing wealth and income inequality and pledging to restore a progressive tax system. To that effect, he promised to “end the preferential treatment that’s built into (p.84) our tax code by eliminating corporate loopholes and tax breaks,” announced lower taxes on labor and consumption, and pledged the United States would “lead the international community to new standards of information sharing” in the fight against tax evasion (Obama 2007).

This emphasis was certainly politically opportune, as a large majority of respondents polled by Gallup in April 2007 felt corporations and upper-income people were paying too little tax (Carroll 2007). Yet this sentiment is quite constant over time, and Barack Obama had a history of promoting progressive tax reform. As an Illinois state senator he had sponsored the state’s earned income tax credit in 2000, providing low-to-moderate-income earners with a tax break (Irvine 2000). As a US senator he had participated in several attempts at making minimum wage earners eligible for a child tax credit on their income tax (Lincoln 2005; Obama 2006). Moreover, he had co-sponsored Senator Carl Levin’s Tax Shelter and Tax Haven Reform Act in 2005, and his Stop Tax Haven Abuse Act in February 2007 (Levin 2005, 2007). The 2005 bill, among other things, proposed penalties for the promoters of tax avoidance schemes qualified as abusive by the IRS, and the abolition of tax credits for taxes paid to tax haven governments. The 2007 bill reintroduced some of these measures. More important, however, the act sought to enable the Treasury secretary to prohibit the opening of correspondent accounts in the United States and the acceptance of credit cards issued by FFIs from a country seen as impeding US tax enforcement. Barack Obama’s interest in tax justice had thus clearly developed ahead of the financial crisis. Rather than just a useful campaign topic for the 2008 elections, it seems to have been part of his more fundamental political convictions as a “loyal Democrat” (GovTrack.us 2019).

Nonetheless, the bank bailouts of 2008 provided a breeding ground for public outrage over the concealment schemes used by Union Bank of Switzerland (UBS) and Liechtenstein Global Trust (LGT) to hide their US clients from the IRS. Under the leadership of Carl Levin, the Senate Permanent Subcommittee on Investigations (PSI) had already revealed in a 2006 report that Swiss and Liechtenstein banks helped their US clients to circumvent the qualified intermediary (QI) program (Levin and Coleman 2006). The QI program had been set up by the IRS under Clinton mostly to get an overview over who held US securities offshore. Yet it also obliged FFIs to collect withholding taxes on US-source capital income on behalf of the IRS and report US clients holding US securities directly to the service. As an incentive for signing up, the IRS exempted participating FFIs from withholding taxes on their US investments. Virtually all FFIs doing business in the United States thus registered as QIs. But instead of fulfilling the reporting requirement, they created or purchased interposed legal entities registered in Panama and other secrecy jurisdictions to hide the true residence of their US beneficial (p.85) owners. As a result, foreign corporations formally received 70 percent of US-source capital income in 2003 (Government Accountability Office 2007). Despite the report and a corresponding hearing before the PSI, however, the issue did not attract much public attention throughout 2006 and 2007.1

This changed when the PSI released a second report and held another hearing on the issue in July 2008.2 The report benefited greatly from the testimony of Bradley Birkenfeld, a former UBS private banker who had participated in an IRS whistleblower program following a 2006 reform guaranteeing informant awards (IRS 2015). Birkenfeld provided the IRS, PSI, and Department of Justice (DoJ) with documents and e-mails proving the setup of a program by senior UBS private bankers for the systematic circumvention of the QI program’s reporting requirement (Hässig 2010). Based on this evidence, the DoJ detained Martin Liechti, head of wealth management for North and South America at UBS, in April 2008, while the IRS obtained a first John Doe summons from a US federal judge, obliging UBS to surrender nineteen thousand client files or be subject to civil penalties in the United States (Simonian 2008; Schaub 2011). Under the impression of this concerted action, Mark Branson, the chief financial officer (CFO) of UBS’s global wealth management branch, admitted wrongdoing during the PSI hearing in July and announced UBS would end its offshore business with US clients (US Senate 2008b). Against the background of Treasury’s recent bailouts of Bear Stearns, Freddie Mac, and Fannie Mae, the PSI report’s estimate that circumvention of the QI program cost the US Treasury $100 billion in tax revenue, implying a higher tax burden for honest US taxpayers, created what a senior OECD tax official called “the perfect storm” (Levin and Coleman 2008).3

Carl Levin and his cosponsor Barack Obama used increased media attention to call for the swift adoption of their anti–tax haven bill. While Levin spread the message in several televised interviews (Chung 2008; Levin 2008), Obama issued a press statement stating that “Washington must take the recommendations of the Subcommittee’s report seriously … ​and enact the Stop Tax Haven Abuse Act that I introduced with Senators Levin and Coleman to combat tax abuse” (States News Service 2008). Although there was no immediate legislative activity ahead of presidential elections, senior IRS and DoJ officials, who had either already been confirmed by the Democratic Senate majority or were positioning themselves for promotion under the incoming Democratic administration, heard the message and intensified their efforts (Hässig 2010; US Senate 2008a). In November 2008, the DoJ indicted Raoul Weil, head of global wealth management at UBS, for “conspiring with other executives, managers, private bankers and clients of the banking firm to defraud the United States” (DoJ 2008). The following month it offered UBS a deferred prosecution agreement (DPA), providing for the suspension of criminal investigations against the bank in exchange for a $780 million fine (p.86) and the transmission of 250 client files. In parallel, Treasury officials worked with their French and German counterparts to put the issue of financial secrecy on the agenda of the G20.4 Despite the remote connection of financial secrecy to the outbreak of the financial crisis, heads of state and government thus declared at their first crisis meeting in Washington that “lack of transparency and a failure to exchange tax information should be vigorously addressed” (G20 Leaders 2008). In reaction, the OECD circulated an updated draft blacklist of countries not complying with its upon-request standard for information exchange, prompting Austria, Luxembourg, and Switzerland to drop their reservations against the administrative assistance clause of the OECD’s model tax convention in March 2009 (OECD 2009). This was considered a breakthrough at the time but proved to have little effectiveness in curbing tax evasion, as a result of the weakness of the upon-request standard (Johannesen and Zucman 2014). In any event, Treasury officials and congressional staff were already preparing the next step.

Preparing Anti–Tax Haven Legislation

When Barack Obama took office as president of the United States in January 2009, he was committed by his own statements and to his former cosponsor Carl Levin to push for the adoption of the Stop Tax Haven Abuse Act. However, Treasury officials were skeptical toward the bill, as they perceived the proposed exclusion of tax haven FFIs from correspondent accounts in the United States as too disruptive. Instead, they suggested an approach complementary to the QI program, extending its reporting requirements and using a 30 percent withholding tax on the US-source revenue of noncompliant FFIs as sanctions mechanism. During the following months this proposal was further developed in a drafting process led by the chief tax counsel of the House Ways and Means Committee and with representation from the IRS and Senate Finance Committee. According to several interview partners, the most senior people in the room had already drafted the QI program under Clinton.5 The final product was then part of a long list of anti-evasion and anti-avoidance measures included in Treasury’s Green Book on revenue proposals for 2010 and discussed in the president’s budget proposal (cf. US Treasury 2009; Office of Management and Budget 2009).

On the occasion of the release of these documents, President Obama and Secretary of the Treasury Timothy Geithner announced a two-pronged strategy for “leveling the playing field” for US taxpayers. The first element of the strategy was the “[removal] of tax incentives for shifting jobs overseas” through reforms of deferral and foreign tax credit rules often exploited by corporations to minimize their tax bill. The strategy’s second element, “getting tough on overseas tax havens,” (p.87) involved the closure of loopholes in check-the-box rules allowing multinationals to set up hybrid entities to avoid taxes, an increase in IRS staff investigating tax evasion, and the extension of the QI program’s reporting requirements and sanctions mechanisms discussed earlier (Office of the Press Secretary 2009). In a concomitant press conference, President Obama (2009) explained, “we’re beginning to restore fairness and balance to our tax code. That’s what I promised I would do during the campaign, that’s what I’m committed to doing as President.”

Although Obama threw his full weight behind these measures and could work with Democratic majorities in both chambers of Congress until 2011, proposals interfering with corporate tax planning did not go far. As under Clinton, Treasury faced massive opposition from multinationals and their lobbyists against a reform of check-the-box rules and measures to end the deferral of tax payments of foreign profits (Rubin and Drucker 2014; Scott 2014). The only items from the Obama-Geithner plan passed by the Democratic Congress before 2011 were aimed at loopholes in the QI program. As such, these provisions primarily concerned FFIs circumventing their reporting obligations. Following the drafting process discussed previously, Senator Max Baucus and Representative Charles Rangel, Chairman of the House Ways and Means Committee, introduced these proposals to Congress as the Foreign Account Tax Compliance Act (Baucus 2009; Rangel 2009). The act requires FFIs to report accounts held by US individuals and—to unravel the concealment schemes used to circumvent the QI program— to legal entities beneficially owned by US individuals. For such accounts, FFIs “must report the account balance … ​, and the amount of dividends, interest, other income, and gross proceeds from the sale of property” (Grinberg 2012, 23). The QI program’s reporting requirement was thus expanded from income on US securities to all capital income earned by US residents.

Moreover, FATCA does not use incentives like the QI program to make FFIs participate but instead relies on coercion. As legislators put it quite explicitly, the act’s objective is to “force foreign financial institutions to disclose their US account holders or pay a steep penalty for nondisclosure” (Grinberg 2012, 24). This penalty is a 30 percent withholding tax “on the gross amount of certain payments from US sources and the proceeds from disposing of certain US investments.” These monies include the revenue from an FFI’s own investments in the United States, payments beneficially owned by its clients regardless of their residence, and so-called “pass-through payments” channeled through a participating FFI to a nonparticipating FFI (Grinberg 2012, 24). The latter provision is meant to also force into participation those FFIs that are not investing in the United States directly but are investing in or through participating FFIs. As one of the act’s original authors put it,

(p.88) FATCA tries to use the combined weight of US financial markets and financial institutions that must, as a practical matter, do business in the US marketplace as leverage with other [FFIs] to ensure near-comprehensive participation in FATCA’s cross-border information reporting.

(Grinberg 2012, 24–25)

Given the act’s focus on reporting requirements for foreign banks, US multinationals were largely unaffected and thus did not submit a position when Chairman Richard Neal held a hearing on FATCA in the Subcommittee on Select Revenue Measures (US House of Representatives 2009). Similarly, the American Bankers Association (ABA) did not object to any of the act’s core provisions, as the reporting requirements and sanctions mechanism did not apply to its members. The ABA did, however, insist that US banks, which were supposed to act as withholding agents for the IRS under FATCA, would be given enough time to build necessary administrative infrastructure as well as accurate information on the participation status of FFIs to avoid penalties for not fulfilling their withholding duties. Despite the additional compliance burden for US banks, the ABA expressed support for “legislation that will ensure that all US citizens and residents pay their fair share of taxes, and thus, prevent loss of millions of dollars by the US because of taxpayers that engage in illegal use of offshore accounts” (US House of Representatives 2009, 80). The association’s positive attitude was of course grounded in the expectation that FATCA would remove incentives for US clients to hold accounts with Swiss or Liechtenstein banks and could thus produce net new money for the private wealth management divisions of its members. Owing to FATCA’s innocuousness for domestic business, Chairman Neal could thus conclude his opening statement at the FATCA hearing as follows:

In terms of the economic confrontation … ​America currently is experiencing, … ​it makes good sense, before we talk about raising revenue elsewhere, that we begin talking about closing down these tax havens and these loopholes that the American people have justly come to see as being patently unfair.

(US House of Representatives 2009, 4)

In other words, he was sympathetic to the idea of addressing the fairness concerns of US citizens through a crackdown on secrecy jurisdictions instead of a hike in taxes on domestic business. Accordingly, Patrick Tiberi, the subcommittee’s ranking minority member, congratulated him on a bill that “does not blur the issues of tax evasion and legal tax practices, and does not include the most controversial international tax policy changes proposed by the Administration” (US House of Representatives 2009, 5). As a result of general agreement on FAT-CA’s ability to send a signal of fairness to voters at virtually no cost for domestic (p.89) business, the act passed Congress in March 2010 as a financing mechanism attached to the Obama administration’s second stimulus package after the financial crisis (Mollohan 2010).

FATCA’s Impact on International Tax Politics

FATCA Becomes Intergovernmental

Congress had conceived FATCA as a domestic law with extraterritorial reach, establishing a direct regulatory link between FFIs and the IRS. When the act passed in March 2010, no intergovernmental approach was envisaged. In fact, FATCA’s predecessor, the QI program, had worked in exactly the same way, creating obligations for foreign banks, not foreign governments. As Tanenbaum (2012, 623) puts it, FATCA “was steamrolling down on a unilateral basis without any immediate serious attention being given to the pursuit of bilateral or multilateral alternatives.” Questioned about why the United States had not tried to tie FATCA into ongoing work on automatic exchange of information at the OECD level (the TRACE project), a former senior Treasury official replied, “Once FATCA was enacted, everything that went on with TRACE, well that was important and we had a lot of resources committed to it, but the law enacted in the US had to be complied with first. So TRACE was understood as an add-on some time in the future.”6 The focus shifted to the international level only once the IRS had published the first guide to FATCA implementation in August 2011.

At this point, many FFIs realized that the act’s reporting requirements would collide with data protection and bank secrecy legislation in their home countries, putting them between a rock and a hard place. Either these FFIs had to break domestic law to comply with FATCA or accept the 30 percent withholding tax due in case of noncompliance (Eccleston and Gray 2014). In addition, many FFIs wanted to avoid entering in a privity of contract with the IRS, as this was a very weak basis for changing terms and conditions for their clients and would have subjected them to direct enforcement action by the United States. Instead, they preferred to fulfill FATCA reporting requirements under national law and toward national authorities, which could then pass account information on to the IRS. Accordingly, the FFIs lobbied their respective governments for the creation of corresponding intergovernmental agreements.7 At the same time, the US Treasury Department grew increasingly concerned over a Swiss campaign for new comprehensive withholding tax deals with other OECD members, which the department understood as a challenge to the principle of AEI embedded in FATCA.8

(p.90) The Swiss campaign was a reaction to demands from the international community for greater administrative assistance after the UBS and LGT scandals. From 2008, the DoJ had pressed an increasing number of Swiss banks for the transmission of US client files by threatening them with criminal indictment in a US court. In parallel, the IRS had requested such files from the Swiss government through administrative assistance. After some initial resistance, the prospect of losing their US banking licenses prompted several Swiss banks to surrender the requested data in violation of Swiss bank secrecy laws. In addition, the Swiss federal court removed the differentiation between tax fraud and tax evasion from Swiss tax law, which the Swiss government had until then used as an excuse for not complying with information requests. As a consequence of that decision, the Swiss government not only responded to the IRS request, but also dropped its reservation against the OECD Model Tax Convention’s administrative assistance clause, which had been the basis for the OECD’s decision to put Switzerland on the G20-backed tax haven blacklist in 2009 (Emmenegger 2017; Hässig 2010).

After years of concessions, the Swiss Banking Association (SBA) then tried to regain the upper hand and preserve bank secrecy through its so-called Rubik concept for bilateral tax treaties. The concept foresaw the collection of withholding taxes on the capital income of the treaty partner’s residents, the proceeds of which would then be channeled back to the treaty partner. In addition, Switzerland would collect and transfer a one-time tax on the treaty partner’s residents’ financial wealth to cover past tax liabilities (Grinberg 2012, 27). In exchange, the identity of nonresident investors in Switzerland would be protected and the number of information requests from the treaty partner capped at a certain number.9 The Swiss government embraced this concept and began to offer Rubik agreements to its key trading partners in December 2009 (Emmenegger 2017). In October of the next year, Rudolf Merz, the Swiss minister of finance, could announce the opening of negotiations on Rubik agreements with Germany and the United Kingdom, which were interested in tapping a new and quickly available revenue stream (Israel, Flütsch, and Nauer 2010).10 This announcement provided Luxembourg and Austria with another pretext to delay the material and geographic extension of AEI at the EU level. More important, however, the British and German governments’ interpretation of Rubik deals as a viable alternative to AEI additionally motivated the US Treasury to intercept the Swiss campaign with its own initiative for intergovernmental FATCA implementation.11

It was thus shortly after the United Kingdom and Germany had signed Rubik deals with Switzerland in August and September 2011, that Emily McMahon, assistant secretary of the Treasury, announced that the United States “was committed to entering into bilateral and multilateral agreements that would allow financial (p.91) institutions to comply with FATCA without violating local law” (Grinberg 2012, 25). To this effect, Treasury opened negotiations on a “common approach to FATCA implementation” with France, Germany, Italy, Spain, and the United Kingdom (EU G5) (US Treasury 2012c, 2). From the US perspective, these countries were crucial trading partners whose tax authorities had the necessary know-how and were engaged in cordial relationships with the IRS.12 From the perspective of the EU G5, the US initiative provided a response to the reservations these countries’ domestic banks had about entering into direct contractual relationships with a US authority and to the difficulty the EU G5 faced in materially and geographically extending AEI within the EU.13 Moreover, the EU G5 hoped for agreements binding the United States to reciprocate information reporting.14

After swift consultations, the US government and EU G5 thus issued a joint statement in February 2012. In that statement, the EU G5 committed to implement legislation requiring their banks to collect account information as requested by FATCA and to transfer the reported information automatically to the IRS. In exchange, the United States pledged to eliminate the requirement for banks from the EU G5 to enter into direct contractual relationships with the IRS and to reciprocate information reporting (US Treasury 2012c, 2–3). Together, the United States and the EU G5 committed “to working with other FATCA partners, the OECD, and where appropriate the EU, on adapting FATCA in the medium term to a common model for automatic exchange of information” (US Treasury 2012c, 3). Moreover, the US Treasury had realized at this point that FATCA treaties would meet less resistance from foreign governments if they were embedded in a multilateral AEI framework. As a former official in the department explained:

FATCA doesn’t really work as a unilateral system. The secret to FATCA is that it needs the multilateral agreement. The level of resistance that you have from foreign institutions and sovereigns just disappears once you have a multilateral process. Because now you can’t complain that the US is doing something. Now it’s an international standard and the US is just the leading implementer. It makes a huge difference.15

Following the joint statement, the United States thus used its agenda-setting capacity at OECD level to lend additional momentum to the emergence of AEI as the new global standard for information reporting. Within the next six months, Treasury drafted a model intergovernmental agreement (IGA) in cooperation with the EU G5. The so-called Model 1 IGA, which later also provided the basis for FATCA treaties with secrecy jurisdictions such as the Cayman Islands or Luxembourg, contains a clause obliging signatories to cooperate with the OECD in the establishment of multilateral AEI. The clause states:

(p.92) The parties are committed to working with Partner Jurisdictions and the Organisation for Economic Co-operation and Development, on adapting the terms of this Agreement and other agreements between the United States and Partner Jurisdictions to a common model for automatic exchange of information, including the development of reporting and due diligence standards for financial institutions.

(US Treasury 2012a, Art. 6, para. 2)16

Given that the United States and EU G5 had committed each other as well as future signatories of FATCA Model 1 agreements to pursuing multilateral AEI, it was only consistent that G20 ministers of finance commissioned the OECD shortly afterward to deliver a report on the matter. G20 leaders approved this report in June 2012, calling on all countries to adopt the AEI standard (G20 Ministers 2012; G20 Leaders 2012). The same month, the United States and Switzerland issued a separate joint statement on FATCA implementation, declaring “their intent to negotiate an agreement providing a framework for cooperation to ensure the effective, efficient, and proper implementation of FATCA by financial institutions located in Switzerland” (US Treasury 2012b, 1–2). The corresponding treaty was based on an alternative model agreement, providing for the direct reporting of account information from FFIs to the IRS. The treaty was finalized in December 2012. Four years after the UBS scandal and following constant pressure from the DoJ and IRS on the Swiss government and financial sector, Switzerland had finally lifted bank secrecy for the United States (Emmenegger 2017). By not transmitting account information to the IRS itself, however, the Swiss government had initially tried to limit the damage, save its Rubik campaign, and avoid demands from other governments for equivalent cooperation (Barandun, Niederberger, and Valda 2012; Niederberger 2012; Rutishauser 2012b).

These efforts were to no avail; although the German ministry of finance had tried to play a double strategy, sticking to the Rubik deal to recover past tax liabilities of German tax evaders in Switzerland while promoting AEI as the new global standard through cooperation with the United States and in the G20,17 the agreement failed in Bundesrat, the German parliament’s upper chamber, in November 2012 (Bundesrat 2012). Social Democrats and Greens, who then held a majority in the chamber, had taken issue with several elements of the Swiss-German Rubik deal. At a most fundamental level, the opposition parties criticized the preservation of anonymity and the post-hoc legalization of hidden wealth as an undue privilege for German tax evaders in Switzerland, who had broken the law by underreporting their capital income (Bundesrat 2012, 500). Moreover, Greens and Social Democrats argued the agreement would undermine the work of German tax investigators because it limited the number of information requests (p.93) to 1,500 a year and banned the active solicitation of stolen account data,18 which had proved quite an efficient tool at the time to create media attention, waves of voluntary disclosures, and billions in additional tax revenue (Finanzverwaltung des Landes Nordrhein-Westfalen 2018; Ministerium für Finanzen und Wirtschaft Baden-Württemberg 2014). In addition to these domestic concerns, however, Greens and Social Democrats also embraced arguments put forward by the EU, OECD, and US Treasury, saying a Swiss-German Rubik deal would at least delay the material and geographic extension of AEI via FATCA (Bundestag 2010, 8472, 2012a, 20656). Following a recommendation from the OECD’s Centre for Tax Policy, Green members of the Bundestag’s Finance Committee had, for instance, invited Itai Grinberg, former Treasury official and one of the authors of FATCA, to explain at a public hearing why a Swiss-German Rubik deal could give other offshore centers a pretext to oppose multilateral AEI (Bundestag 2012b).19 German opposition had thus bought into the strategic considerations of international AEI proponents before rejecting the Rubik deal in Bundesrat.

The almost simultaneous failure of the Swiss-German Rubik deal and Swiss agreement to a FATCA treaty with the United States finally cleared the way for the ascent of AEI as the new global standard for cooperation against tax evasion. While the United States sped up its efforts to extend the reach of FATCA worldwide, striking corresponding treaties with 112 foreign governments, including all major secrecy jurisdictions (US Treasury 2018a), Eveline Widmer-Schlumpf, Swiss minister of finance, announced shortly after agreeing to the FATCA treaty that she would also enter into a dialogue on AEI with the EU (Valda 2012a). Moreover, she created the Brunetti Group, tasked to develop proposals for the reorientation of Swiss international tax policy (Valda 2012b). These developments broke a deadlock in negotiations among member states on a material and geographic extension of AEI within the EU (Hakelberg 2015b), made the G20 endorse automatic exchange of information as a global standard (G20 Leaders 2013), and led to the creation by the OECD of a “common reporting standard” (CRS) based on FATCA (OECD 2014g), which has since been adopted by more than one hundred governments through the “multilateral competent authority agreement” (OECD 2017a).

FATCA Enables Agreement on AEI at the EU and OECD Level

At the EU level, Luxembourg and Austria, the biggest recipients of nonresident deposits from within the euro area (ECB 2015), were blocking AEI on interest payments to nonresidents since the Commission had proposed a Savings Directive in 1998 (Genschel 2002). The Council of Ministers still adopted the directive (p.94) in 2003, but to reach consensus its proponents had to concede Luxembourg, Austria, and Belgium the right to levy a withholding tax on interest payments to nonresidents instead of collecting account information on behalf of EU partners. This concession meant some additional tax revenue for the rest of the EU, but account holders in these three countries remained anonymous (Rixen and Schwarz 2012). According to the directive, their opt-out from the AEI should end once Switzerland and several non-EU microstates started to report information on EU account holders upon request (European Community 2003, Art. 10). Yet as Luxembourg and others had expected, Switzerland and the microstates merely accepted the withholding option in their Savings Agreements with the EU, postponing EU-wide AEI into the indefinite future (Council of the European Union 2004).

Following the LGT scandal, Peer Steinbrück, German minister of finance, put a revision of the Savings Directive on the agenda of the March 2008 Council on Economic and Financial Affairs (ECOFIN) (Mussler 2008). With the support of his French and Italian counterparts he encouraged the Commission to speed up review of the directive and called for a “material and geographic extension” of its AEI mechanism (Bundesministerium der Finanzen 2008, 31). The Commission presented a corresponding report in fall 2008, conceding that investors could circumvent the directive by either hiding behind interposed legal entities or investing in equity rather than interest-producing debt securities (European Commission 2008b).20 As remedies the Commission advocated a look-through approach obliging banks to use information obtained through know-your-customer due diligence when determining account ownership, and an extension of the Savings Directive’s scope to securities that investors may consider equivalent to debt in terms of their risk profile. In contrast, the Commission did not propose changes to the AEI opt-out granted to Luxembourg, Austria, and Belgium (European Commission 2008a).

Instead of a swift revision of the Savings Directive, however, Germany, France, and other large EU members experienced what Luxembourgian Prime Minister Jean-Claude Juncker had already forecast at the March 2008 ECOFIN meeting: “many years of fascinating debate” (Mussler 2008). During the next four years, Council presidencies made six attempts at passing a revised draft and a mandate for Commission negotiations with Switzerland on a corresponding Savings Agreement.21 Every time, Luxembourg and Austria refused to agree, arguing that a level international playing field had to be established ahead of their consent. That is, Switzerland had to first signal its willingness to practice AEI with the EU; otherwise, capital flight from the common market was the likely result.22 Switzerland, in turn, used the nonparticipation of Luxembourg and Austria in intra-EU AEI to justify Swiss unwillingness to do just that (Naegeli 2010). Interestingly, however, (p.95) Switzerland offered to update its Savings Agreement with the EU in accordance with the OECD’s upon-request standard (Naegeli 2011). Yet Swiss politicians knew that the Savings Directive’s transition clause made this the crucial condition for a removal of the transitory withholding option, which gave Luxembourg and Austria an additional reason to block any mandate for commission negotiations on a revised Savings Agreement. Because of the unanimity requirement in tax matters there was little to nothing large EU members could do to break this arrangement (Hakelberg 2015b).

The only item on intra-EU cooperation in direct taxation that passed during this period was a severely stripped-down version of a proposal the Commission had made for an Administrative Cooperation Directive. The proposed directive stipulated that the Commission, assisted by a committee of national tax experts, should define income types subject to AEI, as well as the conditions under which information should be exchanged (European Commission 2009). Thereby, the Commission aimed to circumvent cumbersome Council procedures in the future. Unsurprisingly, however, Luxembourg and Austria opposed such annulment of their de facto veto power in tax matters. As a result, the final version of the directive agreed on in December 2010 left everything as it was. AEI became an option for future administrative assistance, but covered income types had to be agreed on in subsequent Council decisions (European Union 2011, Art. 8). Moreover, the Luxembourgian and Austrian finance ministers could celebrate the codification of the availability principle. That is, even if the Council decided to practice AEI on capital income other than interest, tax authorities needed only to transmit data readily available to them. Data that tax authorities did not collect domestically were thus excluded from EU-internal exchange in any case (European Union 2011, Art. 3; Schweizerische Depeschenagentur 2010). Eventually, the directive served only to transpose the OECD’s upon-request standard into EU law, including a customary most-favored-nation (MFN) clause obliging member states to extend any greater cooperation offered to a third country also to one another (European Union 2011, Art. 19). This MFN clause seemed benign in December 2010 and thus passed without debate. But the intergovernmental implementation of FATCA would soon turn it into a Trojan horse, breaking Austrian and Luxembourgian opposition to intra-EU AEI.

The same week that Eveline Widmer-Schlumpf announced agreement on a FATCA treaty with the United States, Luc Frieden, Luxembourg’s minister of finance, declared his country would also enter negotiations on a FATCA deal, and extend equivalent cooperation to EU partners (Valda 2012a). A few months before, he had still argued in the ECOFIN that the Swiss-German Rubik deal was the better model for an EU-wide solution than AEI. Yet the Rubik deal’s failure in the German Bundesrat had definitively taken that option off the table. Frieden’s (p.96) announcement was thus a major and quite sudden change of tack, the underlying reasoning of which Jean-Claude Juncker, prime minister of Luxembourg, made explicit in his state of the nation speech a few months later:

If we now modify our position, we do it because the Americans do not leave us a choice. They restrict their financial operations to countries which accept automatic exchange of information. If we do not comply with this condition, there won’t be any financial operations with the USA. Yet an international financial center cannot cut itself from the American financial circuit. … ​We cannot refuse to also extend to the Europeans the concessions that we have to make to the Americans within the context of a bilateral treaty.

(Juncker 2013, 346)23

As Germano Mirabile, head of sector for savings taxation at the Commission, explained in May 2013, the reason Luxembourg could not refuse to grant equivalent cooperation to EU partners was the MFN clause contained in article 19 of the Administrative Cooperation Directive. “This means that member states, having concluded a FATCA agreement with the US, need to decide now on a legal basis for their equivalent cooperation with EU partners.”24 Other interview partners confirmed the importance of Luxembourgian participation in FATCA for its acceptance of AEI within the EU and beyond, and the crucial role of the MFN clause as transmitter of US pressure to the European level.25

The clause was equally important in relations between the EU G5 and the Austrian government, which was less forthcoming than Luxembourg despite the launch of negotiations on a FATCA treaty with the United States in January 2013 (Der Standard 2013). In fact, the Austrian finance ministry initially argued that a direct transmission of account data from Austrian banks to the United States, as foreseen by the alternative model IGA agreed on between Switzerland and the US government, would not create an obligation to accept AEI within the EU, as Austrian authorities were not directly involved in the reporting. From the legal standpoint of the Austrian finance ministry, Austrian banks were cooperating with the United States as a result of the FATCA agreement, not the Austrian government (Bramerdorfer 2015; Szigetvari 2014).26 Yet this interpretation was far from compelling, as the FATCA Model Agreement on which it was based states in article two that

[FATCA Partner] shall direct and enable all Reporting [FATCA Partner] Financial Institutions to … ​register on the IRS FATCA registration website with the IRS by July 1, 2014, and comply with the requirements of an FFI Agreement, including with respect to due diligence, reporting, and withholding.

(US Treasury 2014b, 6)

(p.97) The agreement thus bestows an active role on the Austrian government in facilitating automatic information reporting by Austria’s financial institutions to the IRS. Therefore, there may have been a basis for an application of the MFN clause. At any rate, the disputed legal situation enabled the EU G5 to uphold a credible threat of suing Austria before the European Court of Justice for respect of the MFN clause. As a senior German tax official explained:

We told them explicitly in bilateral conversation: either you participate in AEI or we will apply the MFN clause. And then you can go ahead and take legal action, à la this isn’t even a case for the MFN clause, but that will take three to five years and you won’t be able to see through that.27

To further increase the pressure on Austria, EU G5 finance ministers also sent a joint letter to EU Commissioner for Taxation Algirdas Semeta in April 2013, urging effective application of the MFN clause and calling “on all EU Member States … ​to agree without delay on the amending proposal to the Savings Taxation Directive of 2003” (EU G5 Finance Ministers 2013, 1–2). This concerted action against isolated Austria had the desired effect. At the ECOFIN meeting in May 2013, Austrian Minister of Finance Maria Fekter finally agreed to a mandate for Commission negotiations on a revised Savings Agreement with Switzerland. In addition, EU finance ministers decided the revised Savings Directive should be passed once Switzerland signaled its willingness to practice AEI with the EU in these negotiations (Council of the European Union 2013). The latter point was an easy concession to Austrian and Luxembourgian concerns about a level playing field, as Eveline Widmer-Schlumpf had already announced in December 2012 she would discuss AEI with the EU.

In parallel to the US-induced breakthrough at EU level, the intergovernmental implementation of FATCA also put AEI on the agenda of the G20 and the OECD. After G20 leaders had already called on all countries to adopt this practice in June 2012, and the EU G5 had declared their intention to develop a multilateral tax information exchange agreement based on the FATCA Model IGA they had agreed on with the United States, finance ministers and central bank governors reiterated their support in April 2013, endorsing AEI as “the expected new standard” (OECD 2014g, 9). Under the impression of this renewed momentum, the Brunetti Group created by the Swiss minister of finance recommended in June 2013 that Switzerland should practice AEI with the EU and other countries to avoid parallel standards and thus minimize compliance costs for Swiss banks (Brunetti 2013). Beginning with Pierin Vincenz, CEO of Swiss Raiffeisen Group, an increasing number of Swiss bankers had come to the conclusion over the course of 2012 that the administration of multiple Rubik agreements was more complex than the automatic reporting of account information based on a single (p.98) global standard (Flubacher 2012). As Vincenz explained in an interview, “if we agree to a withholding tax with all neighboring countries this gets very complex, because every country has a separate method for its calculation. Moreover, there will have to be continuous updates. … ​And there will be automatic exchange of information with the USA anyway” (Rutishauser 2012a).28 By June 2013, the CEO of UBS, the Swiss Bankers Association, and the Swiss Private Bankers Association had also adopted that position (Flubacher 2012; Schweizerische Depeschenagentur 2013b, 2013a). After publication of the Brunetti Group’s report, the Swiss ministry of finance thus acknowledged that AEI would become the new global standard for tax cooperation and pledged active participation in its development (Eidgenössisches Finanzdepartement 2013). Moreover, Eveline Widmer-Schlumpf followed up on her December 2012 statement, declaring Switzerland would apply a global AEI standard negotiated at the OECD in its relations with the EU (Valda 2013).

In September 2013, G20 leaders eventually endorsed AEI as the new global standard, calling on the OECD to develop a framework for coherent worldwide application of AEI by mid-2014 (G20 Leaders 2013). Hence, the OECD modeled its CRS on the FATCA IGA agreed on between the United States and the EU G5 to avoid double regulation and ensure a level international playing field. As an OECD tax official involved in its drafting explained, “This made sense on a pragmatic level. FATCA is quite broad so it is useful for many countries. And why invent the wheel again, when you have a standard with a lot of bite? In the end, it is better to have a single standard than several.”29 With the Swiss vote, the standard passed the OECD Committee on Fiscal Affairs in February 2014.30 Tax Commissioner Semeta could thus report to EU finance ministers shortly afterward that Switzerland was seeking agreement on AEI based on the new global standard (Semeta 2014). After six years of fascinating debate, ECOFIN could thus reach agreement on the revised Savings Directive in March 2014 (European Union 2014a). Moreover, the subsequent European Council ordered finance ministers to adopt a revised Administrative Cooperation Directive by the end of 2014, now intended as a vehicle to transpose the OECD CRS into EU law. As a result of newly established consensus, work went ahead quickly, and ECOFIN was in a position to adopt the directive in October 2014. It codifies comprehensive intra-EU AEI on all types of capital income starting on January 1, 2017, with Austria joining a year later on January 1, 2018 (European Union 2014b). Beyond the EU, fifty-one countries used the G20’s endorsement of the OECD CRS in September 2014 as the occasion to sign a multilateral competent authority agreement (MCAA) in Berlin, committing signatories to begin exchanging bank data among each other based on the CRS from September 1, 2017, or 2018, including Switzerland, Luxembourg, Austria, and the Cayman Islands (OECD 2014e, 2014a). An additional (p.99)

Table 5.1 AEI Adoptions among Major Secrecy Jurisdictions

Jurisdiction

FATCA Agreement (Model)

OECD Common Reporting Standard

Signed Multilateral Agreement

Passed Implementing Legislation

Austria

yes (2)

yes

yes

Bahamas

yes (1)

yes

yes

Bahrain

yes (1)

yes

yes

Belgium

yes (1)

yes

yes

Bermuda

yes (2)

yes

yes

Cayman Islands

yes (1)

yes

yes

Curaçao

yes (1)

yes

yes

Guernsey

yes (1)

yes

yes

Hong Kong

yes (2)

yes (China)

yes

Isle of Man

yes (1)

yes

yes

Jersey

yes (1)

yes

yes

Luxembourg

yes (1)

yes

yes

Macao

yes (2)

yes (China)

yes

Panama

yes (1)

yes

yes

Singapore

yes (1)

yes

yes

Switzerland

yes (2)

yes

yes

Note: Major secrecy jurisdictions include countries identified as such in table 1.1.

Sources: OECD (2017a, 2018b); US Treasury (2018a).

fifty countries subsequently adopted the standard, including Hong Kong and Singapore (see table 5.1).

By imposing FATCA on FFIs worldwide, developing an intergovernmental approach to its implementation with the EU G5, and striking bilateral FATCA treaties with 112 jurisdictions, the United States had thus enabled agreement on AEI within the EU and at the global level. Within the EU, Luxembourg and Austria would have risked legal action by the G5 if they had not accepted AEI after entering into negotiations on FATCA agreements with the United States. At the global level, the imposition of AEI through FATCA changed the preferences of banks in secrecy jurisdictions. Before FATCA, these banks were seeking to apply the least stringent form of tax cooperation with foreign governments. When FATCA forced them to build the infrastructure for automatic reporting of account information, the banks became interested in practicing a single global standard to minimize compliance costs. As a result, jurisdictions submitting to FATCA generally also pledged to apply the OECD CRS in their relations with other countries (see table 5.1). This pledge, in turn, reduced the risk of capital flight from Luxembourg and Austria to third countries linked to the acceptance of AEI at EU level. By (p.100) facilitating a multilateral AEI regime through FATCA, the United States had thus created a level playing field for secrecy jurisdictions inside and outside the EU. However, the AEI regime’s architect was itself missing from the list of signatories of the MCAA, as accession to the agreement would have meant adoption of reciprocal AEI (Vasagar and Houlder 2014). As the next section will show, the US financial sector was fiercely opposed to new domestic reporting requirements that would enable reciprocity, while the Obama administration was unwilling to pick a fight with finance over this issue. Hence, what politicians and activists alike celebrated as a historic breakthrough for international tax cooperation suffers from a major equity problem: the lack of reciprocal exchange of information from the United States.

The Lack of US Reciprocity

Neither FATCA agreements nor the MCAA, which the United States has not signed, legally bind the United States to reciprocate the information reporting it requests from other countries. The United States is thus receiving data on US account holders from across the world but is not obliged to disclose equivalent information on nonresidents to treaty partners. In fact, the US government pledges to reciprocate information reporting on nonresident account holders only in one variant of FATCA treaties, the Model 1 IGA agreed on with the EU G5. Yet even this IGA does not provide for full reciprocity, given that the United States lacks the domestic regulations to collect all the data from US financial institutions it requests from FFIs, including nonresidents’ account balances, non-US-source dividends, and beneficial ownership of trusts (Christians 2013, 2014). Accordingly, Model 1 IGAs feature the following qualificatory clause:

The United States acknowledges the need to achieve equivalent levels of reciprocal automatic information exchange with [FATCA Partner]. The United States is committed to further improve transparency and enhance the exchange relationship with [FATCA Partner] by pursuing the adoption of regulations and advocating and supporting relevant legislation to achieve such equivalent levels of reciprocal automatic exchange.

(US Treasury 2012a, Art. 6)

The Obama administration, indeed, included requests for full FATCA reciprocity in its 2013 and 2014 budget proposals (Office of Management and Budget 2013; US Treasury 2014a). However, these requests did not appear in corresponding Green Books on revenue proposals, which are the documents US tax experts consult when in doubt over Treasury’s intentions. As a former Treasury official explained:

(p.101) The budget of the United States says a bunch of [stuff] that has to do with the spending side, and occasionally it has some language about tax. But that language is political rhetoric. The real proposals, fledged out at a level of detail that matters, are in the Green Book. Not in the Green Book? There is no proposal for reciprocity! In other words, the document a tax lawyer would read doesn’t even have it. … And ​that is something you often see in international economic politics, that you send different messages to national and foreign audiences. And this is an example of that. Any uninformed observer would understand that the US government had put out a politically important message. An observer inside the sub-community would see something different.31

The Obama administration was thus sending a double message on reciprocity: reassuring its international partners by including corresponding requests in the budgets, while appeasing domestic interests by not retaining them in the Green Books. The underlying rationale for this strategy was apparently that an early focus on reciprocal AEI and corresponding reporting requirements for US banks might have provoked domestic resistance to FATCA, potentially undermining its full implementation. Treasury thus preferred to “take it in steps.” As a former senior Treasury official clarified, “In the long-term reciprocity will make sense. But at the front edge the logic is different. If we try to make this perfect today, it will probably never happen and I would say that about FATCA generally.”32 Apparently, Treasury was dragging its feet to avoid the “entrance of [the] US financial industry into the fight” over reciprocity (Garst 2014).

But even the rather limited regulatory changes the Treasury Department proposed in order to send a signal of willingness to US treaty partners received a good deal of domestic resistance. When the IRS issued a regulation in 2012, extending a requirement for US banks to report interest payments from applying to Canadian account holders only to applying to all nonresident aliens (NRAs), the ABA blasted in response: “these … ​regulations will further strain banks’ information technology staff and budgets, for the sole purpose of providing information to the IRS, especially when there is the risk that many banks will lose billions of dollars in deposit funds due to the resulting loss of many of their NRA customers” (Mordi 2011, 2). Moreover, the banking associations of Florida and Texas, whose members host a lot of Latin American wealth, took legal action against the IRS, “claiming the regulation was overly burdensome and could lead to massive capital flight because legitimate customers might fear their information would be disclosed to, and misused by, rogue governments” (The Economist 2014). Although the regulation eventually took effect after the legal challenge was thrown out of court in 2014, US banks can still circumvent the requirement of reporting foreign (p.102) clients and their capital income by divesting their portfolios of debt securities or hiding their identities behind a trust.

The reason is that the Financial Crimes Enforcement Network (FinCEN), the US Treasury agency responsible for countermeasures to money-laundering, adopted new customer due diligence (CDD) rules in 2016 that allow US banks to identify as the owner of a reported account the trustee who manages assets on behalf of the actual beneficiaries. In fact, the rules allow this practice even when a trust owns more than 25 percent of a legal entity for which a US bank would otherwise have to obtain beneficial ownership information under the new regulations (FinCEN 2016). Whereas foreign banks thus have to look through trusts when determining account ownership under FATCA, according to FinCEN “identifying a beneficial owner … ​would not be possible” for US banks, owing to the complexity of the contractual arrangement (FinCEN 2016, 29412). Because of this gaping loophole, the new obligation for US banks to identify the beneficial owners of other legal entities, which looks like a major improvement over the status quo ante (cf. FATF 2006), becomes virtually meaningless. In fact, a foreigner who previously invested in the United States through an anonymous shell company simply needs to put her assets in trust to remain invisible from her domestic tax authority. Hence, the new reporting requirements the Obama administration adopted to demonstrate some goodwill to US treaty partners reveal a considerable degree of hypocrisy on closer inspection.

According to several sources, the divergence in reporting standards imposed on foreign and domestic banks results from the US financial sector’s intense lobbying, which created internal conflict between different branches of the US Treasury. Whereas FinCEN officials were committed to establishing financial transparency, banking regulators felt that US financial institutions had already been stretched thin as a result of post-crisis reforms. Therefore, the imposition of additional adjustment costs without any direct benefit for the United States did not gain priority with the department’s senior decision makers.33 So FinCEN (2012, 2016) took four years to move from proposed to final CDD regulations and also granted US banks an additional two-year transition before the new but ineffective rules took effect in May 2018. In the meantime, committed foreign tax evaders most likely managed to rearrange their financial affairs so as to ensure their continued anonymity. Despite more restrictive CDD, US banks thus continue to enjoy a competitive advantage over FFIs in the management of hidden wealth, which has resulted in a shift of cross-border deposits from traditional secrecy jurisdictions to the United States.

As Max Schaub and I have shown elsewhere, the adoption of FATCA and the emergence of multilateral AEI that FATCA precipitated led to the desired withdrawal (p.103) of foreign deposits from traditional secrecy jurisdictions between 2010 and 2015. At the same time, however, cross-border deposits in the United States grew at an above-average rate, which suggests that foreign account holders reacted to the AEI by shifting some of their financial wealth to the last reliable secrecy jurisdiction instead of bringing it home (Hakelberg and Schaub 2018). Our results match statements from Austrian tax advisers, who claim that nonresidents shifted some of their financial wealth from Austrian to US banks after Austria agreed to AEI in the EU.34 Moreover, these findings are corroborated by reports of US wealth managers and tax advisers, who actively promote the secrecy benefits attached to US trusts among affluent foreign households (Drucker 2016). Registrations of corresponding contractual relationships have, indeed, multiplied in secretive US states such as Nevada and South Dakota, whereas industry projections expect the value of assets under management in the United States to grow faster than in most traditional secrecy jurisdictions over the coming years. Against this background, calling the United States the new Switzerland has lately gained some currency among wealth managers (Scannell and Houlder 2016).

During his first two years in office, President Trump showed no intent to mitigate the lack of US reciprocity under FATCA. After all, it is a deal that puts America first. Instead, he signed an executive order, instructing Treasury to “review all significant tax regulations issued on or after January 1, 2016, and … ​identify … ​all such regulations that: (i) impose an undue financial burden on [US] taxpayers; (ii) add undue complexity to the Federal tax laws; (iii) or exceed the statutory authority of the [IRS]” (The President 2017, 19317). Accordingly, Treasury and the IRS focused on the identification of hundreds of corresponding regulations in several reports to the president, albeit without including the new CDD rules, which would have been within the time frame of the president’s order (cf. US Treasury 2017b, 2018b; IRS 2018). The IRS thus seems busy defending existing regulations rather than developing additional ones. Likewise, bipartisan legislation on a federal company register that would require formation agents to identify the beneficial owners of all companies the agents help set up remains stalled in the House Committee on Financial Services because of opposition from the financial sectors in secretive US states and the Chamber of Commerce (Maloney 2017; Rubenfeld 2017).

Since no political actor in the United States is willing and able to work toward FATCA reciprocity, foreign governments would have to put pressure on the US government to obtain this goal. As a former Treasury official put it:

No one in either party is really eager to anger the financial institutions in Miami for no reason. They’ll do it, but Florida is a swing state. So you (p.104) will only reach real reciprocity the moment that the political cost of forcing US financial institutions to do something they don’t want to do can be weighed against another cost.35

On the other side of the Atlantic, however, senior tax officials do not believe in their ability to impose corresponding costs on the United States. As a former undersecretary of state in the German ministry of finance conceded, “We couldn’t get more than partial reciprocity from the United States. For domestic reasons they claimed. So we said ok, this is still better than nothing and of course these agreements are always give and take.”36 Another senior German tax official explained his government’s acceptance of a nonreciprocal FATCA IGA as follows:

When the need for such an agreement is not equally strong on both sides and the other side has sharper swords—that is, access to the American capital market—then you won’t necessarily get what you want. Even if several European countries negotiate with the US there is still a difference in power since we are more interested in market access for our institutions in the US than the other way around. The Americans don’t need the German capital market to prosper.37

Owing to its market size and regulatory capacity as well as the apparent prevalence of a purely national conception of power among German tax officials, the United States has thus been able to enforce and stabilize a redistributive AEI regime at the international level. As a partner with a US tax law firm already observed in 2015, “fair is what you can get away with and the United States has the power to defend this outcome.”38

Theoretical Implications

In accordance with theoretical expectations, we observed a Democratic administration that put the fight against tax evasion and avoidance high on the legislative agenda. All Democratic candidates had discussed tax fairness during presidential primaries. But the UBS scandal and Barack Obama’s personal affiliation with key anti–tax haven activists within the Democratic Party made sure the issue stayed high on the agenda also after the elections. As expected, however, the Obama administration managed to get only anti-evasion measures through Congress. Anti-avoidance proposals affected the tax-planning schemes of US multinationals, thus creating powerful domestic opposition. In contrast, anti-evasion measures put the regulatory burden mainly on foreign banks, because the US government does not reciprocate automatic information exchange requested from (p.105) the rest of the world. As a result, US wealth managers now enjoy a competitive advantage in attracting hidden wealth instead of facing additional regulatory costs.

The US government’s ability to maintain such a strongly redistributive outcome points to the importance of coercion for the emergence of the global AEI regime. In fact, the United States triggered the process by forcing foreign banks to routinely report information on US clients to the IRS. FATCA credibly linked noncompliance to partial exclusion from the US financial market. Accordingly, virtually all internationally active banks submitted to US demands, while governments across the world entered into FATCA agreements to ensure continued market access for their financial institutions. As secrecy jurisdictions became more transparent for the United States, these jurisdictions also created demand for greater cooperation from third states. After Luxembourg and Austria had entered into FATCA agreements, for instance, large EU member states invoked a most-favored-nation clause to impose intra-EU AEI on them as well. Likewise, the G20 and OECD declared AEI the new global standard for tax cooperation after Switzerland had issued a joint statement on FATCA implementation with the United States. Thus, the G20 and OECD quenched the hope of secrecy jurisdictions for an anonymity-preserving solution and harnessed bank preferences for a single set of global rules.

Regulative norms did not prevent the United States either from using coercion against secrecy jurisdictions or from taking unilateral advantage of the emerging AEI regime. In fact, secrecy jurisdictions and libertarian activists invoked national sovereignty in tax policymaking as well as the principle of nonintervention to criticize the extraterritorial reach of FATCA. Still, foreign banks registered as reporting institutions with the IRS, accepting the principle of AEI despite not having been involved in the legislative process. Likewise, Switzerland and other secrecy jurisdictions strongly criticized the US government’s refusal to reciprocate AEI either under bilateral FATCA treaties or via the multilateral agreement. The argument was reproduced in the media but failed to have an impact on the eventual shape of the global AEI regime. Despite the obvious unfairness, the United States still practices a double standard when it comes to its own reporting standards, and thus maintains a comparative advantage in financial secrecy. Extraterritoriality, interference with foreign sovereignty, and double standards—the normative arguments that halted the harmful tax competition initiative (according to some accounts) thus did not prevent the use of coercion by the United States or the emergence of the global AEI regime.

Notes:

(1.) A Nexis search for “Qualified Intermediary Program” in all English-language news retrieved six articles between August 2006, when the PSI report was released, and December 2007.

(2.) A Nexis search for “Qualified Intermediary Program” in all English-language news retrieved forty-one articles between July and December 2008, but only three articles between January and June 2008.

(3.) Interview on March 6, 2014.

(4.) Interviews with OECD diplomat for large member state on March 6, 2014; member of German parliament on November 14, 2014; and former undersecretary of state in German ministry of finance on January 28, 2015.

(5.) Interviews with former US Treasury officials on April 13 and 15, 2015.

(6.) Interview on April 13, 2015.

(7.) Interviews with senior French tax official on March 14, 2014; former undersecretary of state in German ministry of finance on January 28, 2015; and senior German tax official on March 3, 2015.

(8.) Interview with former US Treasury official on April 15, 2015.

(9.) Interviews with members of German parliament on October 8 and 16, 2014, and on November 14, 2014.

(p.152) (10.) Interviews with former undersecretary of state in German ministry of finance on January 28, 2015, and senior German tax official on March 3, 2015.

(11.) Interviews with former US Treasury officials on April 13 and 15, 2015.

(12.) Interviews with former US Treasury officials on April 13 and 15, 2015.

(13.) Interviews with former undersecretary of state in German ministry of finance on January 28, 2015, and senior German tax official on March 3, 2015.

(14.) Interview with senior French tax official on March 14, 2014.

(15.) Interview on April 15, 2015.

(16.) According to an OECD tax official interviewed on March 6, 2014, this wording was understood as obliging signatories to cooperate with the OECD in establishing multilateral AEI.

(17.) Interviews with member of the German parliament on October 15, 2014; with former undersecretary in German ministry of finance on January 28, 2014; and with senior German tax official on March 3, 2015.

(18.) Interviews with members of the German parliament on October 8 and 16, 2014, and on November 14, 2014.

(19.) Interview with member of the German parliament on October 16, 2014.

(20.) Research by academics and journalists later revealed that Swiss and Luxembourgian wealth managers had created or purchased a massive number of mostly Panamanian corporations on behalf of their clients just after the Savings Directive and Agreement entered into force in 2005 (cf. Johannesen 2014; Obermayer et al. 2015).

(21.) These attempts were made in January 2009, January 2010, May and July 2011, and May and November 2012 (cf. Council of the European Union 2009, 2010, 2011a, 2011b, 2012a, 2012b).

(22.) For coverage of the negotiations during each of the Council meetings listed in note 21 see Schweizerische Depeschenagentur (2009, 2010, 2011a, 2011b, 2012) and Council of the European Union (2012b).

(23.) Translation from Luxembourgish by the author.

(24.) Interview on May 24, 2013.

(25.) Interviews with OECD diplomat for small member state on March 5, 2014; with OECD diplomat for small member state on March 7, 2014; with senior French tax official on March 14, 2014; with European Commission tax official on March 28, 2014; and with senior German tax official on March 3, 2015.

(26.) Interview with senior Austrian tax official on July 14, 2014.

(27.) Interview on March 3, 2015. Translation from German by the author.

(28.) Translation from German by the author

(29.) Interview on March 6, 2014.

(30.) Interviews with OECD ambassador for small member state on March 4, 2014, and with OECD diplomat for large member state on March 6, 2014.

(31.) Interview on April 15, 2015.

(32.) Interview on April 13, 2015.

(33.) Interviews with former Treasury officials on April 13 and 15, 2015.

(34.) Interview with partner and manager of Austrian tax law firm on July 7, 2014.

(35.) Interview on April 15, 2015.

(36.) Interview on January 28, 2015. Translation from German by the author.

(37.) Interview on March 3, 2015. Translation from German by the author.

(38.) Interview on April 17, 2015.