The implementation of FATCA in lebanon - Assignment Example

The implementation of FATCA in Lebanon Signed into law on March 18 the Foreign Account Tax Compliant Act (FATCA) is regarded by Deloitte as anextension to the Hiring Incentives to Restore Employment (HIRE) Act of the United States Internal Revenue Code. FATCA was developed to identify US taxpayers’ holding accounts in Foreign Financial Institutions (FFIs) in order to enforce reporting of those accounts through withholding. The main objective of FATCA is to enforce tax compliance of US citizens with offshore financial accounts.

The estimated cost of tax evasion to the US economy stands at USD 100 billion/year largely due to citizens hiding their money and assets in offshore accounts. The Internal Revenue Services (IRS) that implemented FATCA, projects that FATCA will help increase tax revenue by USD 7.6 billion within ten years. FATCA requires Foreign Financial Institutions to register with the IRS, thus enabling the US [tax agency] to identify, collect and report financial information of offshore bank accounts, particularly those belonging to US clients with a threshold of USD 50,000.

On the other hand, foreign companies are also required to abide by FATCA1. This means that these companies have to modify their internal systems including processes, control frameworks and due procedures. In Lebanon, the banking system is governed by the secrecy law of September 3, 1956. This law prevents Lebanese banks from divulging any information about their clients to any authority. Article 1 of the banking secrecy subjects all foreign and Lebanese financial institutions to professional secrecy unless there is a special approval from the Minister of Finance.

Furthermore, article 2 of the banking secrecy forbids managers, employees or any person with access to the bank’s operations, books, or bank correspondents from divulging any information to any authority or individual except with the permission of the said client, his/her legatees, or in case of bankruptcy. Therefore, the banking secrecy law binding financial institutions in Lebanon prevents the adoption of FATCA by FFIs in Lebanon. This implies that US citizens holding bank accounts within Lebanon are protected from FATCAs’ interference.

However, financial institutions in Lebanon may find it easier to comply with FATCA if the Lebanese government enters into an Intergovernmental Agreement (IGA) with the United States Government2. According to the Financial Times, (23rd January, 2013), several countries have joined the Intergovernmental Agreement with the US including Mexico, Denmark, Ireland and Switzerland. An IGA for Lebanon in this case would be a framework between the United States and the Lebanese Government on how to implement the FATCA rules, thereby allowing for the effective and efficient implementation of FATCA across all international banks.

The Intergovernmental Agreement can be applied via two models. The first Model involves financial institutions preparing information on the accounts held by US citizens and reporting their findings directly to the IRS. The second model is based on financial institutions reporting directly to their respective governments who then exchange the information with the IRS3. Therefore, unless Lebanon enters into an IGA with the United States, FATCA cannot be implemented in Lebanon since both models are illegal [conflict with the baking secrecy law] in Lebanon4.

The IGA shall compel all the Financial Institutions in Lebanon serving clients from the US to comply with the FATCA rules. Notably, currently, the Lebanese banking secrecy law prevents their financial institutions serving customers from US to dispatch financial information regarding these persons to the US financial institutions as required by the FATCA. Nonetheless, this requirement can only be achieved if the United States’ government appeals through IGA convention. It is important to note that the Lebanese banking secrecy law currently prevents financial institutions serving US clients from complying with the requirements of FACTA.

Therefore, complying with FATCA would require the Lebanese Government to (1) repeal the banking secrecy law of 1956, or (2) allow financial institutions the freedom to comply fully with FATCA5. However, these options bring with them serious economic implications that may be detrimental to the Lebanese economy6. For instance, the absence of the banking secrecy law implies that clients’ financial information will be vulnerable, thereby jeopardizing the security of their accounts. This may discourage United States investors from establishing businesses in Lebanon7.

Nevertheless, the Lebanese Government may amend the banking secrecy act to exclude all assets and financial accounts held by the US citizens in its financial institutions. This option will also place Lebanon as an undesired investor destination for US citizens. On the other hand, both the United States and the Lebanese Government may opt for an IGA and implement either of the two models described above. Alternatively, they may opt for non-compliance that will require the Lebanese Government to withdraw from IGA countries' membership with the United States, thereby excluding financial institutions within its territory from the FATCA8.

This option will be a blow to the implementation of FATCA in Lebanon. However, there are routes to implement FATCA rules in countries where anti-money laundering laws are not covered by the banking secrecy act.9. Countries with ineffective anti money laundry laws should be asked to amend their anti-money laundering acts in order to comply with the FATCA requirements to facilitate its implementation. For instance, the government may extend the duties of the “the special investigation commission” 10 to include gathering information on all accounts held by US citizens thereby relaying the information to the IRS through the government of Lebanon.

This will be an easier way to implement FATCA because the banking secrecy act will not be involved, as there will be government-to-government agreements. Generally, the FATCA act will benefit the IRS by allowing easy, effective, and efficient means of FATCA implementation thereby reducing losses that are often incurred through citizens banking with Foreign Financial Institutions. Moreover, implications will affect the countries within which these FFIs reside as they may have to amend their laws to achieve compliance11.

For instance, Lebanon has to enter into a diplomatic engagement with the United States in order to reach a deal that is mutually beneficial to both sides. Therefore, the implementation of FATCA will heighten United States’ foreign relations with Lebanon, particularly through entering into an IGA. Works Cited Machnouk, Souraya, Hachem, Housseini E., Abou, Jaoude & Associates. FATCA: a serious threat to Lebanon's banking secrecy? July 2013. Retrieved Feb 25, 2013 web< http://www.iflr1000.com/LegislationGuide/794/FATCA-a-serious-threat-to-Lebanons-banking-secrecy.

html> Deloitte. Foreign Account Tax Compliance Act (FATCA) Retrieved Feb 25, 2013 web< http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/Tax/us_tax_FATCA_Executive_Summary_020613.pdf> 25/02/2013 LAW of September 3, 1956: On Banking Secrecy Beirut, September 3, 1956. LAW No. 318 of April 20, 2001. FIGHTING MONEY LAUNDERING [Extract from the Official Gazette, Number 20 of April 26, 2001].