Robert Morris on FATCA

At last a book about the beast, FATCA.

I read Robert Morris' FATCA and the New Birth of American Empire in one sitting a few weeks ago and I just posted a review up on Amazon.

It's not long and it's not an expensive book but it is for you?  The disclaimer at the beginning is very helpful because Morris clarifies that he is not speaking to Americans abroad in his essay.  If you are one of these "US Persons"  he has no advice to offer though he points out that what's happening to them (us) is a darn shame.  I immediately disagreed with him on two points however in that introduction:  he says Americans living outside the U.S. have power (which is nonsense) and that media outlets are willing to shine the spotlight on our stories (yes, but only very recently and after much effort by folks like Marvin, Peter and Lynne).

"This essay will focus on everyone else."  So his words are meant for those not directly in the line of fire - all those who think they are safe and that this business does not concern them because they are not US citizens or don't have connections to the United States.

Morris begins by admitting that at first glimpse the law might seem to be quite a fine thing for those committed to the fight against tax evasion:  "FATCA requires foreign businesses to provide information on any US accounts they manage to the United States Internal Revenue Service (IRS).  If those foreign banks and investment companies do not do this, they are subject to a 30% withholding tax."

Good for them, some say.  At last something that really goes after all those darn tax cheats - those who profit from America but who, when the time comes to pay the bill, illegally send their money offshore, leaving the poor fools at home to face higher taxes.

Ah, but the devil indeed is in the details and a closer reading of the law (and the 500+ pages of regulations AND all those intergovernmental agreements) is required to understand the full scope of this nasty little piece of extraterritorial legislation.  If it were just Americans impacted then it would simply be an affair between Americans in the homeland, the America diaspora abroad and those Yanks who keep their precious persons at home but let their money do the migrating.

Morris argues that everyone in the world is impacted in ways that are hard to see from just a cursory reading.  His claim is that FATCA is "imperialist, racist and protectionist" and his essay is the case for repeal on those grounds.

FATCA is U.S Imperialism:   FATCA requires that foreign (that is, non-US) entities be strong-armed into acting as enforcers for the American government.  Every US person (a US citizen, a Green Card holder or anyone with a connection to the United States) is a target and a potential source of revenue even if they don't live or work in the U.S. and the money earned was earned entirely outside of the United States.  You wouldn't get more extra-territorial than that - we are talking about people, assets and bank accounts that do not live on U.S. soil.  Up until FATCA these things were subject to the  laws of the country where they were located.  Getting a job, earning a living and opening a bank account in Country A meant obeying the laws of that country and paying taxes to that government.  FATCA (and by extension citizenship-based taxation) turns that on its head:  "The most important laws governing the economic activity of US citizens abroad are no longer the laws of the country that they live in."

Furthermore, in order to implement the law in the 190+ countries of the world, foreign countries are being asked to change their own laws, charters and constitutions to make them FATCA-friendly.  Hard to see how anyone could argue that this is not imperialism.  "The level of instrusiveness is staggering.  If a given country has a confidentiality law that forbids their banks from sharing this kind of information, then the law has to be changed.  Put simply, with FATCA the United States is asserting the right to tell other countries what their laws should be."

FATCA is Racist & Protectionist:  500+ pages of complex regulations in English.  Small countries and emerging markets, Morris argues, are at a terrible disadvantage under FATCA.  Developed countries already have experience with complex regulations but even they are groaning under the sheer cost of re-tooling their IT systems and modifying their procedures to comply.  How are less-developed countries supposed to manage?  This was, in fact, a point made at the European Parliament FATCA meeting last year (my report here) by Action Aid  "who pointed out quite rightly that such systems and the information they contain must be made readily available to developing countries."

I see no sign whatsoever that the Europeans or the Americans are taking this aspect seriously.  FATCA is an affair of les grands and the little people and the little countries will simply have to adjust to this brave new world.

But Morris makes the point quite well, I think:

"FATCA creates a catch-22.  Banks from emerging markets can only become large modern financial institutions by competing in international markets.  FATCA, however, requires these banks to be large modern financial institutions before they can compete in international markets...The developed countries did not have to put up with these burdens while they were developing, it is unjust to force others to take them."

"Now that the benefits of economic growth are finally spreading to non-white (or non-Japanese) areas of the world, the US government is ensuring that a vital part of every country's economy, the banking sector, is reserved for the already developing countries.  This protectionist measure may not be racist in intention, but it certainly is in effect."

As for those intergovernmental agreements (IGA's) one could see them as special deals the US is making with its "friends"  - the other developed nations.  One has only to look at the French IGA to see how the burden has been lightened for this and other European countries.  "The rich and established countries are being given a lighter, easier path to dealing with FATCA."  Will African, South American or Asian banks get the same deal?  We shall see.

FATCA begets GATCA (a term coined by Marvin van Horn).  The idea of a worldwide information financial information system has been around for quite awhile.  There are other systems in place or in progress that more or less do what FATCA does.  The EU, in particular, has what it calls AEOI (automatic exchange of information) and they are expanding it.  It is more mature than FATCA (which has yet to be implemented) and the Europeans have chosen a more step-by-step approach.  The OECD has also been working on it and has this fine article about how they view the matter.

But they all have the same ultimate objective:  to be a model for the rest of the world.  I have speculated more than once that the Americans looked at all of this and greatly feared that they would be subject to a system made in the EU and so they decided to float their own system as a counter-offer (if not an outright attempt to do in these efforts in favor of something more favorable to the US).  Is this a race to define the model?  The story is just beginning and I think there will be much negotiation to come as these competing models bump up against each other and their merits and demerits become clearer.  In any case, I would make the point that the idea behind FATCA was not something dreamed up by the United States, but rather something that has been around for awhile now.

Morris touches on the international nature of these efforts:  "With FATCA we will set up an international tax regime that will be subject to the interests of those with the most power.  For the next few decades, the United States will be the most powerful interest.  As all systems do, it will consolidate, and get more powerful.  As this process continues, the system created will look more and more like a worldwide empire.  The evolution will outlast US dominance."

This is where I would part company with Morris.  I am simply not convinced that the final system (and I believe there will be one) will be FATCA.  It's not just that there are competing models out there but also the Americans have not exactly shined in their implementation efforts.  They have struggled to produce the regulations to make the law a reality.  The signing of IGA's has been at a snail's pace and each one is different depending on how well each country was able to negotiate.  That doesn't look terribly efficient nor does it scream "model for the rest of the world."

There is also the uncertainty around reciprocity.  Americans abroad may not be powerful but Americans banks in the United States are.  That foreign banks are subject to FATCA is fine by them - in fact, it gives American banks a competitive advantage.  But the suggestion that they might also be required to turn over information to other countries, well, that does not sit well and they have friends in Congress who will help.

Lastly, the agency that has been tasked with actually setting up the infrastructure and administration for FATCA on the US side is one that is not loved and has a very tight budget:  the U.S. Internal Revenue Service.  On top of last year's scandals, low morale and even further attempts to cut their budget, they have been handed Obamacare (the new US national healthcare system).  Oh what a gift....  Reports from the US seem to say that it is not going well.

The Taxpayer Advocate Service (led by the remarkable Nina Olson) has already warned Congress that the IRS today is not funded sufficiently well to adequately serve taxpayers in the homeland, much less those abroad.  And now they want to add the rest of the world into the mix, responsibility for a model international tax reporting scheme,  while cutting their budget?

Ce n'est pas sérieux.

For the American IRS to do all that they have been asked to do, they need more resources, something that, frankly, I don't see them getting.  And how can the IRS possibly justify spending all that money for FATCA (and the foreign governments and institutions that have now become, in a sense, their customers) while American taxpayers (homeland voters) continue to suffer a decline in services? Something has to give here and I don't think it's going to be Congress that suddenly sees the light.  

For all those reasons, I think we are not even close to settling on one model for information exchange.  I see Morris' assumption that the US will indeed get its way and "dominate" now and in the foreseeable future as wishful thinking and an overestimation of the US government's capacity to efficiently implement their system.  I speculate that as FATCA comes up against other contenders, it could very well be subsumed under other, more carefully thought out models - efforts that are better funded, easier to administer, cheaper to roll out, and where the scope has been more carefully defined so that only the truly useful information is captured.  

But that is, I admit, pure speculation on my part.  Today, no one know for sure where all this going and what GATCA will look like 5 or 10 years down the road.  The fat lady has not sung.  And that is the one serious bone I have to pick with Morris' otherwise excellent book.  I do not agree that the final shape of AEOI as defined by the United States of America  is a done deal and I prefer to keep an open mind and watch what unfolds as opposed to "living in the wreckage of the future."