The United States and the Vatican signed an agreement June 10 to implement FATCA in the Vatican.
Given the rather small size of the Vatican in both land and population (110 acres and under 1,000 people), it can be reasonably believed that the number of American bank accounts in the city-state is small. Local reports say the number of Americans holding money in the Institute for the Works of Religion, commonly known as the Vatican Bank, are likely to be no more than several dozen.
The FATCA agreement followed two years of negotiations between the United States and the Holy See, and a push by the Holy See for more financial transparency. The U.S. ambassador to the Holy See, Kenneth Hackett, said that the agreement marked a “stamp of approval” for financial transparency in the Vatican.
The Vatican Bank has had its fair share of scandal, money-laundering, and mismanagement, something that Pope Francis has made a point of improving.
In justification for essentially becoming de facto IRS agents, the Vatican has put more stress than most other countries on the importance of paying taxes in order to help the poor. At the signing of the FATCA agreement in the Vatican, Archbishop Paul Richard Gallagher, secretary for relations at the Holy See, said that paying taxes is a matter of charity and justice. “As Pope Francis frequently reminds us, evading just taxes is stealing both from the state and from the poor,” he said, stopping short of using any language too reminiscent of the days of indulgences. There was no clarification about what constitutes if a tax is “just” or not.
FATCA was made law in 2010 and went live in January 2015 with its International Data Exchange Service, which links tax authorities in 110 countries and more than 145,000 financial institutions with the IRS to ensure that individuals and institutions are compliant with FATCA and not dodging their U.S. tax obligations.
Banks must comply with IRS rules under FATCA, which means either reporting account information on American clients or signing a statement to the IRS that states they have no U.S. clients. Noncompliant banks will see a 30% withholding on U.S.-dollar wires to their bank. The law has caused many international financial institutions to simply close any American-held accounts and not take new American clients.
The United States is the only developed country that collects taxes based on citizenship instead of residency. The only other countries—developed or not—to tax nonresident citizens based on worldwide income are Eritrea and China.