The Foreign Account Tax Compliance Act (FATCA), the vile U.S. statute that was tucked into the benignly named HIRE Act, is here…leaving individuals and financial firms worldwide scrambling to toe the line.
“More Countries Agree To Help US Crack Down On Tax Dodgers”
“With Clock Ticking On FATCA, Financial Firms Brace For Headaches”
“For Americans In China, The Tax Man Cometh”
… and so on read today’s headlines.
“FATCA is intended to increase transparency for the Internal Revenue Service (IRS) with respect to U.S. persons that may be investing and earning income through non-U.S. institutions. While the primary goal of FATCA is to gain information about U.S. persons, FATCA imposes tax withholding where the applicable documentation and reporting requirements are not met.” – FAQ’s on FATCA
As a refresher, under FATCA US citizens, US persons, Green Card holders and individuals holding certain US investments are required to report information regarding accounts to the IRS. This law requires foreign financial institutions such as your local bank, stock brokers, hedge funds, insurance companies, trusts, etc. – to report directly to the IRS all their clients who are “US persons.” FFIs that do not become compliant will be subject to a 30% withholding on these investments, which will directly impact FFI clients.
FATCA also requires US citizens who have foreign financial assets in excess of $50,000 (higher for bona fide residents overseas – $200,000 for single filers and $400,000 for joint filers – see the IRS website for more details) to report those assets on a new Form 8938 to be filed with the 1040 tax return.
Despite being onerous to all parties involved (including the IRS itself) and deeply flawed (in that it is mathematically unlikely to achieve its purpose) , FATCA is only growing with more countries signing agreements all the time.
Find a list of countries that have signed intergovernmental agreements with the U.S. here.
FATCA certainly has its critics. But intergovernmental agreements on foreign reporting regulations are bound to be met with apathy, if not outright support for the reclaiming of “lost” tax revenue from what we are told is evasion, from the average citizen.
The website Repealfatca.com rightly calls this “the worst law most Americans have never heard of” though it should be noted that the impact of FATCA will be felt by far more than just American citizens.
Looming burdens, controversy, complexity, delays of implementation and mounting resentment.
The following is a by no means exhaustive list of common criticisms from those who are familiar enough with the law to have an opinion.
How FATCA strains U.S. relations with other countries.
Forcing foreign financial institutions and foreign governments to collect data on U.S. citizens at their own expense and transmit it to the IRS has been called (quite generously in my opinion) “divisive”. Canada’s Finance Minister Jim Flaherty has raised an issue with this “far reaching and extraterritorial implications” which would require Canadian banks to become extensions of the IRS and would jeopardize Canadians’ privacy rights. This sentiment is, of course, not unique to Canada.
The legislation enables U.S. authorities to impose regulatory costs, and potentially penalties, on foreign financial institutions who otherwise have few if any dealings with the United States. The U.S. has sought to ameliorate that criticism by offering reciprocity to potential countries who sign Intergovernmental Agreements, but the idea of the US Government providing information on its citizens to foreign governments has also, quite naturally, proved controversial. The law’s interference in the relationship between individual Americans or dual nationals and non-American banks led George Ugeux to call it “bullying and selfish.”
How FATCA burns U.S. citizens living abroad.
The reporting requirements, including penalties, apply to all U.S. citizens, including those who are unaware that they have U.S. citizenship. Since the U.S. considers all persons born in the U.S., and most foreign-born persons with American parents, to be citizens, FATCA affects a large number of foreign residents who are unaware that the U.S. considers them citizens!
There are also no shortage of reports (I’ve heard several firsthand) of many foreign banks refusing to open accounts for and even closing existing accounts of U.S. citizens, making it frustratingly difficult for them to live and work abroad.
How FATCA will produce the unexpected (by Government) and inevitable John Galt effect.
Watch the money flow out. The basic approach to enforcing the compliance of foreign financial institutions is a withholding levy on US assets. This will create a very strong incentive for foreign financial institutions to divest (or not invest) in U.S. assets, resulting in capital flight to more friendly jurisdictions.
Of course the only way to truly shake the chains of FATCA is to renounce your U.S. citizenship.
It’s no secret nor a coincidence that U.S. citizenship renunciations increased sevenfold between 2008 and 2011, and has increase even quicker since then. According to the The New American a record number of Americans gave up U.S. citizenship in 2012 “amid IRS Abuse” and “facing an increasingly out-of-control federal government in Washington, D.C” .
Another surge in renunciations in 2013 and again in 2014 to record levels has been reported in the news media, with FATCA always being cited as a factor in the decision of many of the former citizens.
Why FATCA won’t even work.
FATCA is a sprawling international entity that no one really understands or is ready for.
In a recent survey by Forbes of 500 European and U.S. tax professionals,” 74% cited a lack of clarity in the IRS regulators as the key obstacle to FATCA compliance. Perhaps telegraphing some optimism, 54% of respondents said they expect the IRS to delay FATCA implementation for another six months. ” – read the full article here
Recent news articles have questioned whether or not the IRS can even handle the millions of new complicated filings per year.
But FATCA’s biggest flaw isn’t its near unworkable complexity, it is simple math.
Let’s start with a baseline understanding of the untenable financial position the U.S. is in.
In 2011, the federal government received $2.2 trillion from all revenue sources and spent 3.8 trillion, resulting in a $1.6 trillion deficit.
To put federal government spending in perspective imagine the following…
Suppose that on January 1 the government received its revenue of $2.2 trillion and began spending. To spend $3.8 trillion in one year means the government spends at the rate of $434 million an hour, or more than $10 billion a day.
With $2.2 trillion to spend, spending at a rate of $434 million an hour, the federal government runs out of money at 11:59 p.m. on July 31.
Just how much time will the revenue returned to the U.S. through FATCA buy? About 2 hours per year.
That’s right, the IRS estimates that FATCA will produce about $8 billion in tax revenue over the next 10 years. That is about $800 million per year, or referring back to our example above, enough to run the federal government for about 2 hours.
So for all the burdens placed on U.S. citizens and foreign financial offices, the strain on international relations, the headaches of complexity and compliance, the gross expense of it all…the big payoff is that the U.S. goes into debt at 2 a.m. August 1 instead of 2 hours before.
And that’s the BEST case scenario for the U.S. government because we’ve left out one final glaring detail.
The cost of implementing FATCA will (very) likely be more than it will return.
Whether or not the IRS’s estimate of $800 million a year in increased revenue is accurate doesn’t really matter. Whatever the increase in “revenue” is is not likely to be more than the cost of implementing such a program.
In fact, many are estimating that the cost of implementing FATCA will actually be greater than the revenue returned.
Interestingly, FATCA was not subject to a cost/benefit analysis by the Committee on Ways and Means. Maybe they were afraid of what they may find? Or maybe it’s not really about the money so much as the sweeping increase in global power and influence that FATCA gives the U.S..
Despite all of this, FATCA is happening. Though not officially in place for another 3 months, FATCA has been wreaking havoc since first passed in 2010.
It’s easy to sit on the sidelines and point out what a stupid and destructive thing this is…and other than maybe raising awareness of how stupid and destructive FATCA is it’s also rather pointless.
It seems we have three options in front of us.
1) Ignore it. This will be the overwhelmingly common route taken as apathy has become the norm.
2) Fight it publicly. Look to advocacy groups such as American Citizens Abroad @ Americansabroad.org here.
3) Fight it privately. This is where Q Wealth can help you on a private, personal level. We will be discussing this in Part 2 of this article.
Leave a question or comment below.