[wall st journal] Colleen Graffy on FATCA

rhadamanthus · Jul 18, 2013

I thought this was interesting...

How to Lose Friends, Citizens and Influence
The U.S. Foreign Account Tax Compliance Act seeks to co-opt foreign banks as long-arm enforcement agencies of the IRS.

Beware the sledgehammer used to crack the nut. In this case, the nut is the U.S. government's laudable goal of catching tax evaders. The sledgehammer is the overreaching effect of legislation that is alienating other countries and resulting in millions of U.S. citizens abroad being forced to either painfully reconsider their nationality, or face a lifetime of onerous bureaucracy, expense and privacy invasion.

The legislation is Fatca, the Foreign Account Tax Compliance Act. To appreciate its breathtaking scope along with America's unique "citizen-based" tax practices, imagine this: You were born in California, moved to New York for education or work, fell in love, married and had children. Even though you have faithfully paid taxes in New York and haven't lived in California for 25 years, suppose California law required that you also file your taxes there because you were born there. Though you may never have held a bank account in California, you must report all of your financial holdings to the State of California. Are you a signatory on your spouse's account? Then you must declare his bank accounts too. Your children, now adults, have never been west of the Mississippi but they too must file their taxes in both California and New York and report any bank accounts they or their spouses may have because they are considered Californians by virtue of one parent's birthplace.

Extrapolate that example to the six million U.S. citizens living around the globe. Many, if not most, don't know about these requirements. Yet they face fines, penalties and interest for not complying—even if they owe no U.S. taxes, own no U.S. property, have no U.S. bank account and haven't lived there in years—if ever.

A particularly alarming aspect of Fatca is that it seeks to co-opt foreign banks as long-arm enforcement agencies of the Internal Revenue Service—even when it might contravene that country's own privacy or data-protection laws. If financial institutions don't report U.S. citizens holding accounts with them, these institutions face a 30% withholding tax on securities transactions that originate in the U.S.

Given this threat, why allow an American, or even suspected American, to bank with you? The reporting costs, and the consequences of a mistake, are too onerous. It isn't always obvious who's a U.S. citizen, either. Many, like the very British mayor of London, Boris Johnson, are "accidental Americans." He was born in New York, where his father worked for the U.N. And unless Mr. Johnson has actively renounced his citizenship, which requires an appointment at a U.S. Embassy, forms and fees, he is still an American citizen. Mayor Johnson repudiated his American citizenship in a newspaper column once, but it's far from clear that this would satisfy U.S. authorities. Mr. Johnson, have you filed your taxes and reported all your U.K. bank accounts to the U.S. Department of Treasury yet?

Foreign financial institutions trying to avoid these new requirements have two alternatives: to drop American clients, or don't invest in the U.S. Neither scenario benefits America. And yet it's hard to believe that Chinese financial institutions will acquiesce in reporting their clients' account information to the U.S. Imagine the howls down the halls of Congress if China informed U.S. banks that they must report to China all of the bank accounts held by Chinese citizens in the U.S. or face penalties.

This infringement on the sovereignty of other nations has not gone down well abroad and has only served to reinforce the most negative stereotypes of America. To address this, the U.S. Treasury has been negotiating "Inter-Governmental Agreements" which promise reciprocity in return for compliance. But in a letter to Treasury Secretary Jacob Lew, U.S. Congressman Bill Posey—a member of the House Financial Services Committee from Florida—alleged that Treasury had exceeded its authority in promising reciprocal financial reporting to foreign nations. If Congressman Posey is wrong, U.S. banks will face enormous reporting requirements and costs. If he is right, the U.S. government will face enormous international embarrassment after having coaxed nations into signing IGAs.

The core injustice in America's tax policy is that it is based on citizenship rather than residency. This novel approach is practiced by only two countries in the world: the U.S. and Eritrea. Ironically, then-U.S. Ambassador to the U.N. Susan Rice condemned this practice by Eritrea in 2011 as "the extortion of a 'diaspora tax' from people of Eritrean descent living overseas." Many would describe U.S. practice in similar terms.

Dual citizens like me who live bi-continental lives are aware that there is no upside in our tax position. We are required to file in both countries, we pay taxes where the taxes are highest, and we can take none of the tax advantages either country has to offer. But for many others, whose lives are only in one country—and that one country is not the U.S.—this type of taxation is particularly destructive. It forces honest people with affection for their ties to America to either keep quiet about their heritage, or spend potentially thousands of dollars a year to prove that they owe no U.S. taxes. Or, as is increasingly occurring, it forces them to give up their U.S. citizenship. The result is that the U.S. is turning millions of "good will" ambassadors into "bad will" ambassadors. Can any of this be good for America?

Let's find another way to crack this nut.
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I was unaware of this very complex little tidbit that came along with the HIRE act in 2010. I was also unaware that the US is one of only two countries in the world that do this.

More info on wikipedia.

CometsWin · Jul 18, 2013

This just strengthens existing law.

The IRS previously instituted a Qualified Intermediary (QI) program under IRC §1441 which required participating foreign financial institutions to maintain records of the U.S. or foreign status of its account holders and to report income and withhold taxes.[5] One report found that participation in the QI program was too low to have a substantive impact as an enforcement measure and was prone to abuse.[6] An illustration of the weakness in the QI program was that UBS, a Swiss bank, had registered as a QI with the IRS in 2001 and was later forced to settle with the U.S. Government for $780 million in 2009 over claims that it fraudulently concealed information on its American account holders.[6] Self-reporting of foreign financial assets was also found to be relatively ineffective.

It has been estimated that the U.S. Treasury loses as much as $100 billion annually to offshore tax non-compliance.[8] Therefore, supplementing the reporting regimes already in place was deemed to be the most effective means of increasing compliance and raising government revenue.

http://en.wikipedia.org/wiki/Foreign_Account_Tax_Compliance_Act

rhadamanthus · Jul 18, 2013

Cometswin:

From the same source:

There are wildly varying estimates of the likely cost of implementing the legislation. FATCA is expected to produce approximately $8.7 billion in additional tax revenue over 10 years, which is small relative to the estimated $40 billion per year cost of international tax evasion.[41]:36 The United States Congress Joint Committee on Taxation estimated that the FATCA bill would raise $792 million of additional taxes a year in the next ten years.[42]
Estimate of the costs to the private sector, the IRS and foreign revenue authorities are less precise. Compliance cost to financial institutions alone has been roughly estimated at US$8 billion a year,[43] approximately ten times the amount of estimated revenue raised. The United Kingdom government has estimated that the cost to British businesses alone will be £1.1 billion - £2 billion for the first five years (approximately two thirds of the estimate total additional global tax revenue expected).[44] There are few reliable estimates for the additional cost burden to the IRS, although it seems certain that the majority of the cost seems likely to fall on the relevant financial institutions and (to a lesser degree) foreign tax authorites who have signed intergovernmental agreements.
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And I don't think you read the whole piece -the methodology being employed is eyebrow-raising.

Rocketman1981 · Jul 18, 2013

It is really upsetting that many financial institutions around the world don't want to do business with Americans or American Companies and they also unless they're truly large and global don't want to establish a presence in the US.

Whereas more institutions is more competition and better products and services, we've really messed up much of the global financial system and will ultimately drive people from becoming American Citizens.

The Switzerland situation was telling when they basically were forced to break their own laws to acquiesce to US requests for information.

I have no compassion for tax cheats and those American's hiding money abroad but the system is really making America not the place where people want to be citizens of or have their business based out of.

That is scary when it is those businesses and commerce that makes us the most powerful nation in the world.

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[wall st journal] Colleen Graffy on FATCA

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