IMPLEMENTATION PROBLEMS AND OBSTACLES IN LATIN AMERICA
A lack of automated AML/KYC information at FFIs (particularly newly defined or small FFIs).
Many different methods of capturing client information may be in place, and may differ across departments, business units, offices, or affiliates.
For many smaller to medium sized financial businesses across Latin America, understanding the detailed FATCA regulations in English and the IRS tax terminology may be difficult. The may also have to get client FATCA briefing materials and authorization forms translated into other languages such as Spanish or Portuguese.
For LATAM organisations operating across multiple jurisdictions, there may also be:
A variation in AML/KYC standards.
A lack of a centralised AML/KYC data depository.
A lack of an interconnected/automated compliance system.
A lack of synchronization among multiple operating systems.
Reliance on legacy IT systems which rely on siloed data sources.
The absence of scalable or sufficient flexible IT platforms.
A lack of regular re-evaluation or updating of client information.
Potential deficiencies in compliance standards (e.g., under-staffed, under-budgeted).
Potential differences in reporting standards (e.g., XBRL v. ISO).
Potential differences in accounting standards and quality of accounting data (e.g., IFRS v. US-GAAP).
Customer Data Profiling (system data quality issues).
Bank Secrecy Laws.
Data Protection Laws (e.g., a potential legal conflict because of the obligation to file Internal Revenue Service (IRS) Reports with private and confidential client information).
Banking, Trust and Fiduciary Laws prohibit closure of some types of financial accounts (i.e. Legal Conflict with Recalcitrant Accounts).
Consumer Rights Legislation.
National Tax Laws.
Domestic laws may require that certain types of person have 'statutory rights' to hold financial accounts.
Domestic laws may prevent financial institutions from withholding and remitting tax on behalf of a foreign government.
U.S. based investment vehicles (not defined as FFIs) but will be considering Withholding Agents (WAs) and required to withhold on certain payments made to foreign investors (which are considered to be Non-Compliant FFIs or NFFEs).
FATCA and IGAs may be seeking to indirectly provide the first steps in re-opening negotiation channels for 'Bilateral Income Tax Treaties' (BITTs) with Latin American countries.
FATCA and IGAs may be seeking to indirectly provide the first steps in re-opening negotiation channels for 'Double Taxation Agreements'.
Money Laundering/Tax Evasion in Latin America
"At Risk" Money Laundering Jurisdictions.
Many Latin American countries have continuing high tax burdens.
Personal Risk and/or Threats of Physical Harm to Employees.
Bribery Risk and Sanctions.
Table 1: Comparison of Rates of VAT and Income Tax Evasion (Percentages) in Latin America (Sabaini and Jiménez 2012)
CASE STUDY: BRAZIL
Brazil has a reciprocal Model 1A IGA, meaning that Brazilian FFIs must provide FATCA information directly to the Receita Federal Brasileira (RFB), not the IRS.
FFIs must therefore act in accordance with existing Brazilian laws (i.e. the Brazilian Federal Constitution). In theory there are five areas which might impact Brazilian FFIs when adhering to FATCA requirements.
Principle of Sovereignty.
Principle of Public Order.
Financial System Regulation.
FATCA is not a legally binding international treaty or convention, and therefore is not enforceable in domestic jurisdiction courts. It is a U.S. domestic law with extraterritorial reach or application and only the Brazilian government has sovereignty over Brazilian citizens as well as sovereignty over those individuals who are legally resident in Brazil.
Principle of Secrecy
Applicable to all telegraphic, mail, data, and telephonic communications.
Article 5 of the 1988 Brazilian Constitution (BC 1988) states inter alia:
"All persons are equal before the law, without any distinction whatsoever, Brazilians and foreigners residing in the country being ensured of inviolability of the right to life, to liberty, to equality, to security and to property, on the following terms:
10. the privacy, private life, honour and image of persons are inviolable, and the right to compensation for property or moral damages resulting from their violation is ensured;
12. the secrecy of correspondence and of telegraphic, data and telephone communications is inviolable, except, in the latter case, by court order, in the cases and in the manner prescribed by law for the purposes of criminal investigation or criminal procedural finding of facts;"
Infra-constitutional Complementary Law 105 (LC 105, 2001) allowed Brazilian financial institutions to provide client information in certain define circumstances, (e.g. where there has been administrative proceedings).
Judicial Decision of 15 December 2010 of the Federal Supreme Court (Supremo Tribunal Federal) stated that tax authorities cannot obtain access to bank information of taxpayers without prior court authorisation. So LC 105, 2001 should be interpreted in conformity with Article 88 of the Federal Constitution (protects bank secrecy).
Tax Information Exchange Agreement (TIEA) signed between Brazil and the U.S. in March 2007 was ratified on 13 March 2013 (but no double tax treaty in place).
Article 5 BC 1988 upholds the equality of all persons, Brazilians and foreigners, which means that unequal or prejudicial treatment is unconstitutional.
Differences in treatment of U.S. and non-U.S persons could be constitutionally challengeable.
FATCA requires Brazilian P-FFIs to withhold tax on payments made from Brazil to third parties and to periodically deposit the withholding amounts with the IRS in the U.S.
Complementary Law n° 4.595/64 – sonly the Brazilian government has the authority to impose the obligation to collect taxes such as withholding income tax in domestic investment transactions.
FATCA withholding is not recognised as a tax in Brazil under the National Taxation Code.
Brazil is currently preparing legislation which has been likened to FATCA, aiming to strengthen the requirements for providing information on ultimate beneficial owners of assets held by Brazil tax residents in funds and companies outside of Brazil.
Financial System Regulation
Consumer Protection Code – bank clients have protections:
Discriminating against customers is prohibited;
Unilateral changes tocontracts are prohibited;
Closing client accounts without a reasonable or legal basis would be legally challengeable by Brazilian Consumer Associations and/or Brazilian Public Prosecutors;
Brazilian banking authorities might punish bank administrators if Brazilian banks and financial institutions apply FATCA in breach of Brazilian laws.
Foreign Capital – protections in the 'Foreign Capital Law' and the GC 1988:
Under the 'Foreign Capital Law', foreign capitals are goods, machines and equipment imported to Brazil with no initial disbursement of foreign currency, for the production of goods or services, as well as financial or monetary resources introduced in the country for use in economic activities. In both cases, foreign capitals must belong to companies or individuals with permanent residence or headquarters in foreign countries.
Article 172 BC 1988 "The law shall regulate, based on national interests, the foreign capital investments, shall encourage reinvestments and shall regulate the remittance of profits".
Article 172 BC 1988 protects Brazilians and foreigners equally, and any tax that treats foreign capital unequally is per se unconstitutional.
Article 2 Foreign Capital Law: "To foreign capital invested in the country will be given equal legal treatment to that given to national capital, in equal conditions, any discrimination not foreseen in this statute being prohibited."
Brazilian FIs already provide the Brazilian Tax Authority with annual information on financial accounts, such as: name of the account holder; Brazilian TIN (CPF/CNPJ); account number; name and identification number of the Reporting FI; balance (certain fixed income investments); fixed and variable income earnings; gross proceeds of variable income investments; balance in current accounts; total gross amount of interest paid for depositary accounts. Therefore the difficulty for Brazilian FFIs will be to identify, transform, and use this information for FATCA purposes, and to adapt existing financial reporting systems to incorporate FATCA U.S. person identification (U.S. indicia) and due diligence obligations.
Data Protection in Brazil
No single statute, but governed by Federal Constitution, Brazilian Civil Code, and specific laws (e.g., Internet Act 2014, Consumer Protection Code, Labor Laws).
No legal definition of "Personal Data" in Brazil, but in practice may include information related to an individual, including name, age, sex, profession, address, religion, sexual orientation, criminal background, and any personal communication such as emails.
No legal definition of "Sensitive Data" or equivalent in Brazil.
Brazil does not have a national data protection authority like the UK's 'Information Commissioner's Office', so there enforcement may occur through costly civil suits or other administrative procedures. Public authorities may impose fines and/or revoke licenses or permits.
There is no obligation for FFIs to appoint a data protection officer under Brazilian law.
There are no express restrictions under Brazilian statute for cross-border transfer of data, but many other general principles may apply
POTENTIAL FATCA LOOPHOLES AVOIDANCE STRATEGIES
The high rates of reported and unreported tax evasion and money laundering in Latin American countries means that FFIs and their employees need to be particularly aware of potential FATCA loopholes and avoidance strategies that may be used by U.S. tax evaders. The following 5 areas highlight potential areas of weakness.
Aggregated value of accounts – TARGET
FATCA reporting thresholds require aggregation of account balances in different accounts only when the accounts are held at the same financial institution. Consequently a key FATCA avoidance strategy is for U.S. taxpayers to open foreign financial accounts at a larger number of unaffiliated banks and financial institutions. This effectiveness of this strategy is significantly increased by using the much higher joint spouse reporting thresholds under FATCA.
Below Due Diligence Trigger multiple accounts
U.S. tax avoidance strategies may include devising new "chains of low value accounts" to avoid trigger the due diligence requirements for U.S. persons. In this way, instead of using foreign financial accounts as methods of accumulating foreign holdings, foreign financial accounts can be used as low value funnel accounts to channel foreign cash holdings into non-FATCA jurisdictions but ensuring that all transactions are below the reportable due diligence trigger amounts on financial account balances at any time throughout the year, i.e. FATCA does not identify volume of cash and/or financial instruments transactions, only the amount at specific times.
Identification of specific FFIs in specific jurisdictions in which to open accounts (based on IGA status; systems capabilities; enforcement risks, etc.) – "race to the bottom".
It is inevitable that during the first few years of FATCA compliance implementation there will be jurisdictions and FFIs that have lower or even lax FATCA compliance standards. These may not be discovered by the IRS until up to a few years later because of the phase-in nature of FATCA obligations, and because the IRS may not initially have full capacity to be able to efficiently and effectively monitor and police the FATCA reporting and withholding system. Even then potential IRS investigations may mean that the IRS resources are stretched to the limit. This means that it may be possible for avoidance strategies to target FFIs in jurisdictions where there is a lower quality of FATCA compliance levels and/or investigation and enforcement risks.
FATCA Avoidance or Tax evasion through structuring of Active NFFEs
Short term FATCA avoidance or tax evasion strategies may make use of the Active NFFE exemption. For example, this may include a FI posing as a Non-Profit Organisation, a NFFE that is not yet operating a business (with nor prior operating history), but is investing capital into assets with the intent to operate a business other than a FI (this exception lasts 24 months only). Alternatively a FI may seek to structure or falsify its operational criteria so that it technically (on paper) falls under the less than 50% of the NFFEs' gross income for the preceding year is passive income (dividends, interest, royalties, annuities, rent), and less than 50% of assets held are assets that produce or are held for the production of passive income.
Falsification of FATCA Status Self-Certification Documentation
FATCA is orientated or geared towards the long-term identification and targeting of U.S. persons or entity tax evasion. Therefore FATCA is not currently prepared or orientated towards short-term of one-off tax avoidance schemes or strategies. Where tax evaders wish to carry out one-off or short-term tax avoidance schemes or strategies simply in order to avoid a 30% withholding tax, then they may seek to obtain falsified FATCA documentation relating to entities that fall under a FATCA exemption through self-certification, e.g. Certified Deemed-Compliant FFI with only low value accounts.
 Recent research showed that Latin American firms presented a lower level of accounting quality, even when only those firms cross-listed in the U.S. (global players) were compared (Santana, V.D.F., Rathke, A.A.T., Lourença, I.M.E.C., and Dalmácio, F.Z. (2014). IFRS Accounting Quality in Latin America: A Comparison with Anglo-Saxon and Continental European Countries and the Role of Cross-Listing in the U.S., University of São Paulo and Lisbon University Institute).
 Sabaini, J.C.G. and Jiménez, J.P. (2012). Tax structure and tax evasion in Latin America, (February), Economic Commission for Latin America and the Caribbean, p.35.
 There are limited exceptions and the principle has been upheld and applied to banking information by the Brazilian Federal Supreme Court.
 Recurso Extraordinário n. 389.808. Relator. Min. Marco Aurélio (Dec. 15, 2010).
 The TIEA requires Brazilian authorities to provide information on the payment of inter alia income taxes (IRPF) (Imposto de Renda de Pessoas Físicas); excise tax (IPI) (Imposto sobre Produtos Industrializados); the social contribution tax on net profits (CSLL) (Contribuição Social sobre o Lucro Líquido das Pessoas Jurídicas); company social security financing tax (COFINS) (Contribuição Social para o Financiamento da Seguridade Social); legal entity gross revenue tax (PIS) (Contribuição para os Programas de Integração Social e de Formulação do Patrimônio do Servidor Público); the financial operations tax (IOF) and the rural property tax (ITR) (Imposto Territorial Rural).
 Article 3 of the National Tax Code (Código Tributário Nacional) states: "Art. 3º Tributo é toda prestação pecuniária compulsória, em moeda ou cujo valor nela se possa exprimir, que não constitua sanção de ato ilícito, instituída em lei e cobrada mediante atividade administrativa plenamente vinculada."
 These are: (1) The National Monetary Council (Conselho Monetário Nacional (CMN)); (2) The Brazilian Central Bank (Banco Central do Brasil (Central Bank)); and (3) The Brazilian Securities and Exchanges Commission (Comissão de Valores Mobiliários (CVM)).
 Law No. 4.131 of September 3, 1962 (Foreign Capital Law), Article 1.