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Tuesday, February 5, 2013

FATCA Comes Home

The FATCA cat is truly out of the bag now.

For those just joining the conversation FATCA (Foreign Account Taxation Compliance Act) is a law that was voted in 2010 by the U.S. Congress as part of the HIRE Act. It requires 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.  The legislation is "extra-territorial" which means that the U.S. is imposing American law on the people of other countries.  If one give it a moment's thought, it might occur to a few that this is probably not a good idea and it begs the question:  If Americans can extend the reach of their laws beyond its borders, what's to prevent other countries from doing the same thing?  How would Americans feels if they had to comply on U.S. soil with a law voted in the French National Assembly?

In addition to the blatant affront to national sovereignty, this law is spawning all kinds of unintended consequences.  U.S. Persons (citizens and Green Card holders) outside the U.S. and anyone with a U.S. connection (a child at a U.S. university for example) are starting to find it very difficult to do basic banking in their countries of residence.  Banks are businesses and when they see a customer who is going to cost them money, their reaction is to "fire the customer."  Entrepreneurs are finding it harder to form ventures in other countries since the foreign partners see no reason to subject themselves to the bureaucracy of the U.S. tax authority just because they have included U.S. citizens as partners.

These are serious consequences but they are not getting much attention in the U.S.  The media has done a terrible job of reporting on this and most articles in the American mainstream media are riddled with factual errors.  The "frame" around the law is that this is a necessary evil to catch tax evaders and most folks don't look beyond that, nor do they particularly care about the sorrows and hard times of expatriates (emigrants) and immigrants.  It's not their ox being gored, so to speak, and migrants, wherever they are from, are not the most popular group around.

So what would it take to get Americans to sit up and pay attention to FATCA?

Well, here's a brilliant idea coming from the rest of the world in response to the U.S.:  Reciprocity.

What other countries are saying is simply this:  If the U.S. wants us to report on U.S. customers in our countries then we want U.S. banks to report to us about account holders from our country.  The UK, Mexico, France, Germany and others want something for their trouble - information about their citizens in the U.S. in exchange.  When you consider that the U.S. is a country of immigration this has all sorts of interesting implications.  It is estimated that there are around 1 million Americans in Mexico. Pew says there are nearly 13 million Mexicans in the US.  That means that under a full reciprocity agreement there will potentially be a lot more information flowing south as opposed to north.

The volume is unbalanced but the underlying principle seems fair to me.  However, when the possibility of this sort of mutual information exchange was raised back in July of 2012 it raised a perfect storm of protest in the United States.  The same politicians who voted for FATCA suddenly find that they didn't like the idea one bit if it meant an impact on U.S. banks.

Here we are in February of 2013 and reciprocity is baaaaccccck.  Check out this excellent Reuters' article (link passed along by Just Me),   Exclusive: Foreigners' accounts in U.S. banks eyed in tax crackdown.

Seems that some countries are hard negotiators (France and Germany are cited in the article) and they want the full meal deal before they sign an inter-governmental agreement with the U.S. (called an IGA) to implement FATCA.    The problem is that there is nothing in U.S. domestic law that would require U.S. banks to give out any information to a foreign government beyond interest payments.

Nothing that can't be fixed, right?    According to the article that is exactly what the Obama administration plans to do:  introduce domestic legislation that would require  U.S. banks to do what it already promised in some of the country agreements "to pursue equivalent levels of reciprocal automatic exchange in the future. "  Sounds like the future is right here, right now.

What does this mean?  It means that Americans will no longer be able to ignore FATCA as something that's happening "out there" in the world and is of little concern to the average American.  The Obama administration will have to publicly introduce legislation for full information reciprocity with foreign governments, fight for it in Congress, and make a case to the American people for why this is a good idea.  Oh, what a difference it makes when it's no longer OPM (other people's money).  Last time I looked average Americans have bank accounts and of course the costs of implementing these information exchanges with other countries will be borne by the U.S. consumer.  It's fantasy land to think otherwise.

Hard to see though how the Obama administration could possibly do anything else unless they give up on FATCA entirely.  Without the cooperation of other countries, FATCA is a toothless law.  I agree with James Jatras that this is "the worst law most Americans have never heard of" but if it's going to happen then it is right and just that the pain be shared by all parties, Americans and non-Americans alike.

Time to put your money where your mouth is, homeland Americans.  You want information about overseas accounts to chase down your "evil tax evaders" then you need to understand that there is a price tag associated with that and that regular people are going to have to pay it for FATCA to be a success.  If you think that money out of your pocket is an unreasonable request in this grand scheme to fight tax evasion but you still consider FATCA a splendid idea for the citizens and banks of other countries then you are the worst sort of hypocrite.


bubblebustin said...

The plot thickens, as the US again becomes a victim of their own demise as it's done countless times throughout its history.

Blaze said...

Unfortunately, we have known for far too long United States of Arrogance is "the worst type of hypocrite."

Anonymous said...

Hello Victoria
It will be interesting to see how the French deal with FATCA. The French Constitution of 4 Oct 58, article 55 states: "Les traités ou accords régulièrement ratifiés ou approuvés ont, dès leur publication, une autorité supérieure à celle des lois, sous réserve, pour chaque accord ou traité, de son application par l'autre partie." It is my understanding that this article means that for an international treaty to take precedence over national laws, full reciprocity is required.

It is also my understanding that the IGAs are dependent on the existing bilateral agreements (for example the France-US double taxation treaty).

Furthermore, France recently ratified the amendments made to the Council of Europe/OECD multilateral treaty. I believe all 27 have now ratified the amendments to this convention (which is also open to non EU states).

See the following notes regarding reciprocity.

Revised Explanatory Report to the Convention on Mutual Administrative Assistance in Tax Matters

"11. The Provision of assistance under the Convention is, however, subject to general limitations contained in Chapter IV where taxpayers' rights are safeguarded and where some possibilities of declining requests and limits to the obligation to provide assistance are stated. Moreover, the legal principle of reciprocity is another element of balance in the implementation of the Convention, since a State cannot ask for a form of assistance that it is not ready to grant to other States. The same principle of reciprocity is also a factor in the development of mutual assistance, because a State which wishes to draw more benefits from the Convention will be encouraged to offer more extensive assistance to other States."

The explanatory notes are not binding but they do provide background on the intentions.

The USA signed and ratified (with quite a few reservations) the original treaty. The amended treaty was signed by the USA but has yet to be ratified by the Senate.

So, a one-way, unilaterally imposed FATCA, which lacks full reciprocity, appears to be in contradiction to the spirit of the EU/OECD treaty and Article 55 of the French Constitution.

badger said...

Funny the wording in the Reuters story:
..." two tax industry sources said the administration was considering asking Congress in an upcoming White House budget proposal for the authority to require more disclosure from U.S. banks."....

Excuse me? What about that much vaunted sort-of-kind-of-possibly-in-some-distant-future-alternate-universe 'reciprocity' already proffered?

If Treasury already had the authority to enter into agreements with 'foreign' governments, and reciprocity of some nebulous disingenuous kind was already on offer, then why would Obama need to ask Congress for any authority re domestic US banks and reporting?

If the authority wasn't already there, then the US was lying, or bluffing in offering it up to other countries.

Either way, bad faith, hypocrisy and dishonesty.

All great reasons to sign over your first born to the US under a FATCA IGA.

Hope Canada and others are paying attention. We couldn't get press for our concerns when it was just those of us abroad, but now that US banks are involved, the media jumped on it right away.

DATCA - the FATCA silver lining? Just Me was so prescient in coining the phrase DATCA, and in predicting where this might lead!

Blaze said...

@Anonymous: Constitutions and laws of other countries are no barrier to Foreign Attack to 9204 ogsplayControl All.

Stven Mopsick says those countries will simply change them to accommodate United States of Arrogance.

If US can give itself authority to kill US citizens outside US through a memo, why can't they simply raid the bank accounts of honest people who have the audacity to live outside US?

Anonymous said...

While Geithner was publicly threatening individuals 'abroad' and the IRS was trying to tar all of us living outside the US as criminals and force us into the OVD programs, privately, Geithner was making promises to tax on a territorial basis - only to US CorporatePersons. See:
'The chief of a group of more than 200 CEOs said on Thursday that President Barack Obama had told the business community last month he might back a territorial tax system, a regime that would exempt offshore corporate profits from U.S. taxation.'
.."In 2011, then Treasury Secretary Timothy Geithner privately agreed to move to such a regime in failed talks with Republicans to secure a major budget deal, according to aides present."

Anonymous said...

"Treasury Secretary Geithner: “‘The goal is territorial,’ Geithner said, starting to pull back. ‘I’m not sure we can commit to completely territorial. Maybe 95 or 96 percent.’” (Quoted in The Price of Politics, by Bob Woodward)

Victoria FERAUGE said...

@anonymous, A great link. Thank you very much. I've been reading it and yes it sounds like full reciprocity is required not to mention that they are aware that there need to be some safeguards for people against abuse.

But what surprises me is that the US is negotiating directly with France, Germany, the UK and others. Where in the hell is the EU in all this? Shouldn't the US be negotiating with Europe? I don't get it.

@badger, That is a good question for Allison Christians. She talked a bit about it at the FATCA forum. Do you know if she has written anything else on the topic?

And yes the corporate versus individuals? Yes, Treasury seems to be willing to reassure corporations while leaving individuals twisting in the wind.

Rosy said...

Hey guys, I wouldn't applaud too fast on the reciprocity thing. Remember that dual citizens and US citizens residing abroad will be hit from all sides and will have an even harder time putting their money anywhere - the U.S. included! OOps???!!!

Rosy said...

And to answer the questoin on why not negotiate globally with the EU.. It's probably simple.It's because "union bancaire" or banking unity (a loose translation) has never been implemented. Even within the EU, countries' banking laws are different and there are separate accords between EU countries for info sharing. Suprasovereignty only goes so far.

Victoria FERAUGE said...

@Rosy, I see your point. Perhaps nations will finally get what they've always wanted - and end to dual citizenship.

Anonymous said... “Little incentive for China to implement Fatca”

From the article:

“There is little incentive for Chinese authorities to sign an intergovernmental agreement (IGA) to enable China’s financial institutions to comply with Fatca, as any benefits to it from an exchange of information with US tax authorities are likely to be minimal, say consultants.”

“Speaking at a PwC Fatca roundtable in Hong Kong on February 6, Anthony Tong, US tax consulting leader for Greater China, said it is the US that would gain the most benefits from such an agreement – as it would be onerous for China to comply with no obvious benefit.”

“Although China was not on a list of 50 countries the US Treasury said it was in negotiations with for signing an IGA in November last year, market sources believe that the US is actively engaging with the Asian state to come to an agreement behind the scenes.”