Intergovernmental Agreement with USA on Foreign Account Tax Compliance Act

The following is the speech I delivered in parliament today during the debate on Income Tax (Amendment) Bill

Madam Speaker, I will speak on the parts of the Income Tax (Amendment) Bill that relates to the agreement with the United States to implement the Foreign Account Tax Compliance Act (or FATCA).

The amendments contained in this Bill is effectively facilitating compliance of our financial institutions with FATCA to assist the USA government with identifying tax evaders as deemed so by the laws of the United States. FATCA affects financial institutions and is a matter of relationship between the USA Government and financial institutions with U.S. source income streams.  Typically, foreign governments are not obliged to help facilitate this relationship. Singapore is taking an extraordinary step to facilitate compliance.

As of June 2013, the United Kingdom, Denmark, Mexico, Ireland, Switzerland, Norway, Spain, Germany, France and Italy have concluded intergovernmental agreements (or IGAs) to cooperate with the U.S. on FATCA implementation. Japan and South Africa have consented to cooperation. We will be the first and only country in ASEAN to take such action of cooperation with the USA. Various other countries such as Hong Kong are in talks with USA on their own IGAs.

The Senior Minister of State has explained the reasons for Singapore to enter into IGA with U.S. on FATCA. The USA has made it clear that financial institutions operating in countries that do not sign IGA with U.S. IRS by the end of 2013 must sign individual agreements with the U.S. tax authorities. Failure to do so will subject the financial institutions to a 30% withholding tax, as stated by the Senior Minister of State. Given the importance of the USA as a key political and economic partner of Singapore and the trend of countries complying with FATCA, it is understandable that Singapore will want to work with USA on this matter.

The U.S. Department of Treasury provides two IGA models. Model 1 involves financial institutions in the partner country reporting information about U.S. accounts to the partner country’s tax authority, which then provides the information to the U.S. authorities. Model 2 involves financial institutions reporting directly to the U.S. Internal Revenue Service and partner country agrees to lower legal barriers to reporting.

All the countries that have concluded IGAs with the U.S. are on Model 1, except for Switzerland, which concluded a Model 2 agreement. Japan is considering Model 2 as well. According to Swiss Finance Senior Minister of State, Model 2 “better protects privacy and sovereignty.” Swiss banks will have to report accounts belonging to U.S. taxpayers above a minimum balance, but client’s data will only be exchanged once the U.S. authorities have requested administrative assistance. Singapore had signalled that we will be implementing Model 1 IGA with USA.

I like to raise six areas of concerns with the Senior Minister of State on this matter.

First, is about mutual benefits.

In a reply in parliament in 2009 to a question regarding Singapore being on the OECD countries “grey list” of countries committed to the internationally agreed tax standard, then Second Senior Minister of State for Finance Mrs Lim Hwee Hua had said that “Singapore is starting talks with several countries to update our DTAs (or Double Taxation Agreements) with them on a mutually beneficial basis, including having exchange of information provisions that are in line with the new international Standard.”

In the matter of bilateral agreements, governments form arrangements on mutually beneficial basis. There will be compliance costs. There will be cost incurred by our government to collect data on behalf of the USA. We will be facilitating the U.S. government to implement one of their laws.

Singapore currently has comprehensive DTAs with 71 countries providing for exchange of information, but not with the USA. We have only a limited treaty with the U.S. covering shipping and air transport income.[1]

I like to ask the Senior Minister of State if we are currently negotiating comprehensive DTA with USA or seeking for other concessions from USA in view of us facilitating FATCA? If so, what are these?

My second area of concern is about the cost of compliance. Countries that opt for Model 2 will let the financial institutions deal directly with USA’s IRS. There will be compliance costs for the financial institutions as they may need manpower to deal with queries from U.S. and to change their IT systems to comply with FATCA. In the Model 1 supported by Singapore, our government will collect data from the financial institutions for the USA. While this will make compliance with FATCA easier for our financial institutions, compliance costs will be transferred to the government and therefore to the taxpayer. What is the expected annual compliance cost and would the government be carrying this cost? If not, how will the cost be borne?

In the IGA reached between Switzerland and the USA, three of the six objectives are

(i)                increase “legal certainty by clarifying which Swiss financial institutions are subject to FATCA implementation”,

(ii)              “reduce implementation costs including by suspending, under certain circumstances, certain withholding and account closing obligations”, and

(iii)             “simplify the necessary due diligence procedures”.[2]

The joint statement with Japan also has similar provisions benefiting Japanese financial institutions.[3] Can the Senior Minister of State clarify what are similar provisions in our proposed IGA on FATCA?

My third concern is about the impact on Singapore citizens.

FATCA does not only affect U.S. citizens but is targeted at anyone who is potentially earning a U.S. taxable income stream. This person takes the definition of a “U.S. person”, which is indicated by any one of the following:

  1. U.S. citizenship or lawful permanent resident (green card) status;
  2. A U.S. birthplace;
  3. A U.S. residence address or a U.S. correspondence address;
  4. Standing instructions to transfer funds to an account maintained in the United States, or directions regularly received from a U.S. address;
  5. An “in care of” address or a “hold mail” address that is the sole address with respect to the client; or
  6. A power of attorney or signatory authority granted to a person with a U.S. address.[4]

This definition could see many Singapore citizens being identified as a U.S. person. In a Model 1 IGA, our Government may have to automatically transmit information on Singapore citizens who are deemed as U.S. persons to the USA. What is the government’s estimation of how many Singaporeans will be deemed as U.S. persons in the implementation of FATCA?

Are there any safeguards to limit extraterritorial implementation of foreign laws to prevent overreach by any foreign government on Singapore citizens? As the Senior Minister of State had earlier stated, it is expected that any treaty or international agreement should be fully reciprocal. What reciprocal rights will we have on U.S. citizens on similar matters?

This leads to my fourth concern on the risk of political blowback. Even with full reciprocity in agreement, there are already some quarters in the USA resisting FATCA for fear that reciprocity requirements by foreign governments will compromise the constitutional privacy rights of U.S. credit union members and bank customers. Requests for information by foreign governments, including by Singapore in the USA may be stalled in their courts. What would our government do in the event of limited reciprocity due to U.S. domestic politics when we have implemented our IGA with the U.S.?

My fifth concern is whether this concession to the U.S. may open the door for demands for similar concession by countries. The Bill provides for similar implementation with any other countries beyond the U.S. that Singapore will make similar type of tax compliance agreements with in future. Are there similar agreements some of our other big trading partners will be expecting of us soon in their efforts to identify their own tax evaders?  If so, which are the countries? Would this lead to a situation where many account holders in Singapore financial institutions become subject to foreign scrutiny, with greatly increased compliance costs?

My sixth concern is to understand the parliamentary process.  This Bill allows the Minister to negotiate and conclude the IGA, declare it as effective and then to implement it. There is no need for debate and ratify the IGA in Parliament. In Switzerland’s case, the IGA was entered into in February 2013. The Swiss Parliament voted to ratify it in September 2013. Our Government is now asking Parliament to approve the implementation of an IGA with the USA that does not yet exist and for which we do not have the details on. Shouldn’t parliament have more details of the IGA so that we can better understand the full implications of the Bill?

In conclusion, there could well be international pressure and good reasons for Singapore to enter into compliance with FATCA and in future with other countries on similar type of agreements. At the same time, there are questions that Singaporeans would want answers to, and to know the implications of our compliance with FATCA. Therefore I seek the Senior Minister of State’s answers to the questions I have raised. Thank you.