Passed by Congress in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, this extraterritorial law has sparked global fear, confusion, anger and controversy.
Now that controversy has come home. There is growing domestic opposition to FATCA implementation. U.S. lawmakers and banks are fighting reciprocal information exchange promised to other nations like Mexico and Germany. Yet another delay in implementation was announced recently by the U.S. Treasury.
The road to FATCA began with a simple premise: Force foreign banks to disclose income held by Americans in offshore tax havens. In May of 2009, when President Barack Obama unveiled his proposal, he said, “Taxation is a price of citizenship.”
Obama insisted people and companies trying to avoid paying taxes through offshore accounts “are aided and abetted by a broken tax system, written by well-connected lobbyists on behalf of well-heeled interests and individuals.” He suggested “corporate loopholes…make it perfectly legal for companies to avoid paying their fair share.” The IRS “tax code…makes it all too easy for a number—a small number of individuals and companies—to abuse overseas tax havens to avoid paying any taxes at all.”
To provide new tools to help U.S. catch both individual and corporate tax evaders overseas, Obama proposed FATCA to “let the IRS know how much income Americans are generating in overseas accounts by requiring banks overseas to provide 1099s for their American clients, just like Americans have to do for their bank accounts here in this country.”
Is This Where President Obama and Congress Intended to Go?
Today FATCA bears almost no resemblance to Obama’s initial goal of “commonsense measures” to simplify the U.S. tax system.
Lynne Swanson
Failure to do a realistic assessment of the impact and risks: Congress never asked for an estimate of how much FATCA would cost to implement or a cost/benefit analysis.
For money spent building the system, how much revenue will the U.S. actually receive? Estimates range from $8 billion to $210 billion over 10 years, but no one is certain. There are simply no hard numbers from a credible source.
Failure to identify all stakeholders: FATCA was initially intended to be between foreign banks and the U.S. government. But at every stage of implementation, new stakeholders kept popping up: foreign and regional governments and their tax authorities, the compliance industry, U.S. persons abroad and more.
As the final system takes shape in 2013, some U.S. lawmakers became major stakeholders, weighing in with demands, objections and calls to repeal FATCA.
Failure to identify and involve all stakeholders has proven deadly to FATCA: Criticism grows with both legal and political challenges, which are slowing down implementation and making it even costlier.
Changing directions: By 2011, it was apparent FATCA was not just targeting “a small number of individuals and companies” hiding assets in overseas accounts. Instead, it was capturing honest, responsible Americans living and paying taxes in other countries.
In 2012, Senator Carl Levin, D-Mich., whom Obama credits as one of the FATCA leaders, wrote to the IRS with numerous demands, including that FATCA information be provided “on request” to law enforcement and national security for money laundering, drug trafficking, terrorism financing and other crimes and “misconduct.”
Complexity: FATCA has rapidly become a system weighed down by its own complexities. The Treasury Department has written over 500 pages of new regulations.
They are negotiating intergovernmental agreements, or IGAs, with nearly every country in the world (160+). Some members of Congress question the Treasury’s legal authority to do so. As IGAs are signed, changes are fed back into the regulations, making this a nightmare for foreign financial institutions trying to finish compliance projects.
In 2009, Obama announced 800 new IRS agents to run and maintain the system as he envisioned it. How many more will be needed with a system many times greater in magnitude and complexity, especially if the IRS must gather and provide information to foreign governments?
Unintended consequences: All around the globe, Americans living in other countries are in a rage at the United States, resulting in rising renunciations of U.S. citizenship. Some have already had their legal bank accounts in their communities closed simply because they were born in United States. Some have even had mortgages cancelled.
Banks worldwide are hostile to spending billions to report to the IRS on long-term customers who are legal residents of their countries.
Only nine countries have signed an IGA. They did so with signed promises and expectations that the U.S. would provide reciprocity. This is, at best, questionable. Other countries continue to resist or may sign under coercion, creating strained diplomatic relationships.
Lawsuits and constitutional challenges are being planned and considered in many countries. Two banking associations in the United States have filed lawsuits in federal court over requirements for them to report income on non-resident aliens to their home countries.
Some members of Congress from both parties predict that reciprocity will result in the flight of capital and investment from the U.S., the loss of American jobs, enormous costs to American banks and “irreparable” harm to the U.S. economy.
One American bank has already reported losing $50 million in deposits.
The President insisted FATCA was “commonsense” reform to “restore balance and fairness in our tax code” and to “crack down on illegal tax evasion, close loopholes and make it profitable for companies to create jobs in United States.” Instead, it is a hugely expensive, highly invasive, costly, complicated and controversial proposition at home and around the world.
FATCA has traveled far off the map from its original destination. Now no one—not the proponents or opponents of this law or the lawmakers and bureaucrats around the world making policy or even the average citizen cheering on the fight against tax evasion—can predict what the FATCA landscape will be down the road.
FATCA appears headed for a catastrophic collision.
Recommendations
The President, Congress, the Treasury Department and the IRS need to refocus on the original modest, laudable intent of FATCA to track down Americans removing their assets from the U.S. in order to illegally evade paying U.S. taxes.
Then they need to find improved ways to achieve that end.
“To restore fairness and balance” in the U.S. tax code must include “fairness and balance” for Americans living outside United States.
International cooperation in combating tax evasion should include developing true partnerships around the world that respect the laws, constitutions, sovereignty and interests of other nations.
If leaders fail to act quickly to restore global cooperation and respect, FATCA could represent one of the riskiest projects the U.S. has ever tried to push both at home and internationally.
Victoria Ferauge is an information technology professional. Originally from Seattle, she lived in Japan and has lived in France with her French husband and family for nearly 20 years. Lynne Swanson is a retired human resource professional. Born and raised in Pennsylvania, she has been a Canadian citizen for 40 years.
4 Comments
This is most definitely one of the best
descriptions of the FATCA dilemma I have read.
One would expect that legislation of this magnitude, given the obvious
ongoing difficulties encountered with it's implementation, would be put
on hold until some of the actions mentioned in the article (a proper
cost evaluation, impact and risk assessment, etc.) are dealt with. Given
the massive overreach and effect on every other country on the planet,
one should expect no less.
Dealing with tax evasion is certainly necessary but the approach needs
to be reasonable and well-planned. At present, FATCA resembles the US
Tax Code, with layer upon layer of unclear, incomplete and complex
regulations that will do little to address what it was designed to do.
Hopefully someone will recognize that this is simply not going to work
and take steps to adjust this ill-conceived piece of legislation.
Posted by: Patricia Moon | September 11, 2013 6:21 PM
Excellent article. As a
Canadian citizen and resident, born in the US, I can confirm that FATCA
will have negative consequences for citizens residing abroad. Few
realize that the US is the only country in the world that taxes people
based on citizenship, not residency. (It's citizenship based taxation
that may be at the heart of this issue.) That means if you were born in
the US, left as a child and never returned, you are taxable for the
rest of your life regardless of where you live and where you earn your
income. President Obama described taxes as the cost of citizenship. I
disagree. Taxes are justified by services provided. Non-residents
receive no benefit from US services. I am not eligible for social
security, welfare, food stamps, unemployment insurance, etc., or any
number of benefits that US residents may be entitled to. I believe it
was the prominent Washington Lobbyist James Jatras that predicted "FATCA
will collapse under its own weight". I think we're finally starting to
see it buckle.
Posted by: BeadGirl | September 11, 2013 1:01 PM
FATCA: American English for 'klausterfokken'.
Posted by: bubblebustin | September 11, 2013 10:21 AM
Excellent!
I
would only add to this, that while the FATCA Compliance Complex (FCC) is
still trying to figure out the first 544 pages of regs complexity and
the 9 currently signed IGAs (with Treasury planning 80 or so)....... now
comes the corrections, additions, clarifications just issued yesterday
in the Federal Register. I assume Michael Cohen will soon have an article about that so I will leave out the link.
This would be absolutely maddening for an FATCA administrator,I would imagine. I really feel sorry for the FFI's trying to keep up with the layering of complexity. For the FCC,the FATCA Compliance Complex, this is the gift that keeps on giving. More billable hours and consulting fees will result.
Now, add to this, the G-20 declaration of support for the OECD's Global auto tax data exchange proposal, or a Global GATCA, and the complexity is just starting. Will they just accept FATCA and be done with it, or will they have their own ideas of what it should look like. I am betting on the latter.
Will the USA just accept their GATCA as a replacement for FATCA, or will it be an add-on? I can't imagine the U.S. accepting anything less their their program, as they are pretty hubristic and unilateral about our requirements.
What happens with U.S. Citizen based taxation (CBT) really runs head on with the rest of the worlds' Residency based system, (RBT)? Will the OECD GATCA allow a carve out for the U.S. to continue to assert its dominion over its citizen's residing in their countries, or will they insist on a reciprocal Citizen reporting mechanism just like the USA?
Will USFIs really just accept a domestic DATCA as the GATCA implies that will have to happen if it is truly to be global?
This GATCA is going to be a nightmare with all kinds of repercussions for the world's economy. Who knows what the final FATCA/DATCA/GACTA landscape will be, but the complexity has just started.
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