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Monday, March 26, 2012

The Diaspora Tax War of 2012: Stakeholder Analysis

I was a teenager during the Reagan years in the U.S. and I remember a conversation I had with my parents once day as I was spouting anti-regulation free market rhetoric at the dinner table.  My father said something to me I've never forgotten in reply to my rather uninformed ramblings.  He said, "Just remember that government regulation is what made it possible for us to send you to college."  What did he mean?  Well, my father owns a consulting company and one of their services is to help other companies build and run their facilities in compliance with U.S. government regulations.  The more complex the laws and regulations, the more lucrative the services.

Remembering that lesson got me thinking about  the FATCA/citizenship-based taxation situation as it stands today.  For those of you just joining the conversation, the Diaspora Tax War of 2012 is about the taxation and reporting requirements for U.S. persons (U.S. Citizens and Green Card Holders).  U.S. persons are required to report their income regardless of where it is earned or where they live.  A new law called FATCA would require foreign banks to report the account information of all U.S. persons (U.S. citizens and Green Card holders) to the American IRS and imposes draconian fines on foreign entities for non-compliance.

Clearly, these laws and regulation (old and new) are going to be detrimental to some people and an opportunity for others.  When these things are made it is often not obvious just who the stakeholders are and who will win and who will lose.  It's a rare ill wind, however, that does not blow somebody, somewhere, some good.   I thought it would be instructive to look at the different actors and try to get a better picture of who stands to gain and who stands to lose in this affair.  Today let's talk about some of the possible winners and tomorrow we'll look at the losers (alas, I'm one of them).  As always, feel free to disagree with my analysis or add your point of view in the comments section.

International Tax Lawyers/Tax Preparers:  Just run a search on "FATCA and international tax lawyers" and see how many hits you get.  A lot.  Before FATCA it was already necessary for many of us American citizens and Green Card holders abroad to call on these people in order to properly file our U.S. taxes.  The U.S. tax code has 72,000 pages and the rules concerning U.S. persons who live abroad are very complex.  There are treaties to be consulted and Foreign Tax credits to be found - not a simple matter even for people in relatively simple situations.  Now that FATCA is coming on-line and there is some media attention about U.S. citizenship-based taxation, people are coming out of the shadows and realizing that they are not compliant.   For these people, consulting a good tax lawyer is not optional - it's a necessity.  You'll also notice that a lot of these firms are specifically offering FBAR and U.S. tax compliance services.  One I found is even targeting its offering to those "Accidental Americans" who need help getting compliant so they can renounce their U.S. citizenship.  There is a market here filled with fearful confused people and it is growing.  As a result, these firms are going to make money.

Management and IT Consulting Companies:  As non-US banks become aware of FATCA, all of the big management consulting companies are getting into the game.  Deloitte has an entire site devoted to FATCA - all the key dates, resources and latest news.  They even have A Practical Guide for Analyzing and Implementing the Newly Proposed Foreign Account Tax Compliance Act (FATCA).    On the IT side, these banks are looking at major changes to their systems and will need IT people to plan and implement the changes.  This site is already offering tips and advice on such topics as "Data Quality - the Core Enabler for FATCA Compliance."  Based on my experience with SOX, I predict that FATCA compliance projects will be big revenue generators for these firms.

FATCA Experts:  There is a new niche profession that has been spawned by FATCA called "FATCA Analyst."  According to this site, someone with this expertise can command a very high salary in the U.S.  This just might be a great opportunity for those of you looking for an international job.  Here is a position in Geneva, one in the UK,  and one in New Zealand.  For now a lot of them seem to be contract jobs but I think that once the path to FATCA is clear, these will turn into either long-term contract or full-time positions.  Looking at the qualifications (international tax knowledge, language skills, experience with compliance projects) these people will command high salaries everywhere.

U.S. Government:  This is a mixed bag and I think there are ways in which the U.S. government will lose but let's just look at some of the advantages.  The U.S. government has limited information about Americans abroad (they are not part of the census) but they will have a great deal more information once they start filing tax returns and FBARS (if they are non-compliant).  A U.S. 1040 reveals a lot:  where that person worked and in what profession, how long he or she has lived abroad, if he/she owns property, has he or she taken on another nationality and so on.  From that they can probably make an educated guess as to whether or not the person will ever return to the U.S. Since the compliance burden is on the U.S. person abroad, the FFI (foreign financial entity) and perhaps the foreign government, this is a very cost-effective way of basically doing a partial census of this population.  The U.S. government will also gain revenue.  This site has a pretty good analysis (scroll down to the question "The number of citizens who have been non-compliant while overseas is staggering. Given the constant flow of people moving abroad and returning to the U.S., we'd guess that right now there could be well over 10 million citizens with non-compliant or non-filed returns for multiple years spent overseas.") In fact, I suggest that you read the entire FAQ - it's that good.  Now given that Americans abroad use no services in the U.S. and the majority earned their money in their host countries, this is a wealth-transfer from the host country to the U.S. that is pure profit for the American government (aside from the costs of processing the returns but, who knows, perhaps they will simply improve automation or outsource the task.)  Looking at it very coldly, this type of taxation is politically very popular at home, allows the U.S. government to capture the productive power of its citizens abroad and will net better information to refine future tax and reporting laws.  All this at a very low cost to the U.S. taxpayer.

Foreign Governments:  This is another mixed bag but it looks like the U.S. government is willing to consider reciprocity.  This means that they are willing to force U.S. banks to report to foreign governments.  Once those governments have that data and can analyze how much potential revenue there is, they can make their own laws to capture the productive power of their citizens abroad.  I doubt most countries would try to implement a full citizenship-based taxation system like the U.S. has but they could certainly try something a little more modest like a tax on capital gains earned abroad or interest income.   Interestingly enough, the French President, Sarkozy, is actually proposing something very similar to the U.S. system which would require French citizens abroad to declare their foreign income and taxes and pay the difference between what they already pay in their host countries and what they would pay if they lived in France.

So there you have it.  I'm sure that some of you can come up with other "winners."  Let me be very clear that this post is not about taking a position for or against citizenship-based taxation/FATCA (both of which I am firmly against).  Let's just call this a "Stakeholder Analysis."  Tomorrow we'll talk about the other stakeholders in this affair who are definitely going to lose and how they are refining strategies to manage the impact.


Tim said...

For a long time one of my concerns with the economy has been the state of the Canadian economy has been the state of out insansely overpriced real estate markets. However, I am becoming less concerned about this as I believe the desirability of immigrating to Canada vs. that of the US is growing by leaps and bounds every day. I believe there recently a survey published that indicated 44% of Chinese Millionaries would like to come to the US but 39% would like to come to Canada which on a per capita basis means Canada is a far more desirable destination.

Tim said...

One other thing I note is very few tax lawyers other than friend of IBS Phil Hodgen are in the business of dealing with renounciation. In fact Phil who is the former head of tax section of the California Bar Association claims he was literally laughed at by his colleagues when he decided to specialize his small firm in expatriation tax law. Other lawyers basically told him back in 2008 no one would renounce and there would be no money for lawyers in dealing with renounciations.

Given Phil's extensive travel to places like Southeast Asia and Middle East and what seems to be a very wealthy client base I suspect Phil is having the last laugh.

Victoria FERAUGE said...

Hi Tim,

I concur. I think Canada is really becoming a real hot destination. Others include Singapore, parts of the EU, Australia. New Zealand is interesting too - the Silver Fern visa is quite a deal.

Thank you for the link to that article at Hodgen's blog. There was a basic assumption for many years (someone actually gave it to me over lunch the other day) that "Americans never renounce." Let's put that statement firmly in the past tense. That false assumption still drives a lot of delusional thinking by people in the homeland. It's just inconceivable to them and yet it is happening. I've seen a few articles that have tried to pin it on Obama. That is nonsense the current situation is purely a bi-partisan affair exacerbated by homeland US citizens who scream that overseas Americans are evil tax evaders and then actually have the nerve to be surprised when these people say "sayonara." What did they expect?

I think you're right and Phil is making good money offering this service. Good for him and I love his blog. If it ever comes to that in my case I will send my business his way.