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Monday, January 6, 2014

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."


bubblebustin said...

Truth is, no other nation would pay FATCA any heed if it wasn't for the 30% withholding. Kind of creates a new precedent for the US and the rest of the world's future behaviour doesn't it.

By the sounds of it, FATCA will shut the US out of emerging markets.

Frankly there aren't enough forward thinking people in Congress to kill FATCA before it's done its damage. If there were, FATCA never would have been introduced and made into law in the first place. The motto of US lawmakers should be "ready, shoot, aim".

Anonymous said...

Great analysis, Victoria. I agree with everything you said.
I think it was just irresponsible for the senators who introduced FATCA to have slipped it in another bill, like they did, without extensive analysis, without everyone being aware of what they were voting on.
FATCA was an emotional reaction to the 2009 UBS scandal. They introduced it without thinking a second that their threats of shutting banks from the US market would alienate US citizens abroad. They did not connect the dots between FATCA and CBT.
If the goal was to introduce an international standard, this should not have been stealth legislation. They went at it the wrong way. You don't introduce an international standard by threatening everyone who don't agree with it to exclude them from the US market. They should have worked with the OECD on this to craft something together.
I don't understand why, instead of going ahead with FATCA's implementation, they're not working together toward that more global goal. At this point, I think the US got what they wanted: raising interest for a global automatic exchange of information. Now, they should work with global authorities to implement it.
In the meantime, their John Doe requests work just fine to catch big fish.

I have a couple concerns with this war on tax evasion. I don't think they'll catch many big fish anymore.
Big fish have already been warned and either worked around the new rules or have already straightened their financial situation.

Also, I don't really understand the persecution that the US is doing against ALL Swiss banks. This guilty assumption without having proof and systematically going after all the banks is just wrong.
Canada should indeed be concerned that they might be the next target.

Lastly, knowing the potential fines for inadvertent FBAR violations, and how they're treating people with foreign accounts, how are the non-compliant "normal" people whose info is going to be transmitted going to be treated? Is this going to generate mass panic?
Given the level of non-compliance, I would not be surprised if the US was flooded with data.

bubblebustin said...

Good comment, Anonymous. I don't believe however, that the Justice Department is going after Swiss banks so much as Swiss banks are categorizing themselves out of fear of being later found to have some kind of liability later - similar to the minnows who entered OVDI.

Any global standard must be done by consensus, not by diktat. This is not a consensus, but an act of aggression thinly veiled by the US as the US taking the lead on the fight against offshore tax evasion. FATCA will change the world, but not for the better I'm afraid, because if the world follows by example, greed and nationalism will rule the future of our planet.

P. Moore said...

Very interesting analysis, Victoria. I find it fascinating to see all the criticism and counter-criticism about FATCA when I consider the REAL action has yet to begin. I expect the real screaming will start when the general public in various countries understand what is actually going on and what they are paying for. Of course, if this thing proceeds with any force, there will be the inevitable court challenges as well. I also agree with is highly suspect that the IRS and Treasury will really be able to pull off this poorly crafted plan. Right now I am waiting to see if they come up with yet another implementation extension or if they will try to push ahead in some messy sloppy fashion.

As far as I can figure, there can be no 'Global Standard' of information exchange on a CBT basis, so to do so would mean a major concession for the US.

Anonymous said...

> I expect the real screaming will start when the general public in various countries understand what is actually going on and what they are paying for.

Will the general public ever know what they're paying for (except for US persons who will be asked for proof of US tax compliance and will have to sign W8 forms)? I am afraid the higher costs will just be explained by the cost of compliance in general. I hope lawsuits are going to start coming mainly due to discrimination reasons. Foreign banks should not close US persons accounts. We'll see what they do with regards to joint accounts with non US persons.

As for the IRS/treasury delaying some more, we'll see. They said "no more delay!" :-)

kermitzii said...

Victoria, you should post this as an article on IBS. There is lots to chew on for the commentators. As usual your writing is excellent. Kermit

Victoria FERAUGE said...

@bubblebustin, Yep, I think they have committed and they will only back off if it's a total disaster. Perhaps the IGAs are their way of backing off and saving face.

@anonymous, I think your right. Most didn't think it through but I do believe that there were some that had and got Congress to pass it by simply not giving them the entire picture.I have wondered how much of Stack's letter was in fact addressed to Congress who are surely getting letters and emails from their constituents. I wonder how many asked "what the hell is going on here?"

I also concur that the big fish are long gone. I just can't see anyone with money and access to exepnsive cross-border tax expertise just sitting there waiting to be outed. Where did they go? Who knows but nobody is sharing that information.

@P. Moore - Yes, we ain't seen nothing yet. It will go the courts. I think the duals will be at the firefront of this and we will see cases at the European Court of Justice. But one way they could back off is by a series of gentleman's agreements like say that the duals won't be touched. So there will be the rules and all kinds of little exceptions. At least that's what I read when I see some of the rather fuzzy language in the French IGA.

@Kermit, Thanks for the suggestion. I went ahead and did it this morning.

Christophe said...

Maybe an interesting follow up read: « La richesse cachée des nations – Enquête sur les paradis fiscaux »

En Francais dans le texte:

There is mention and analysis of FATCA.

And a message from John Koskinen, the newly confirmed IRS commissioner:

Speaking to reporters during a 45-minute meeting Jan. 6, Koskinen said implementing both the Affordable Care Act and the Foreign Account Tax Compliance Act are key goals, with FATCA expected to provide a significant amount of information to help the IRS fight offshore tax evasion.

"It symbolizes “the increasing capacity of the IRS and the U.S. to be able to track down offshore accounts and those who have been avoiding income taxes,” Koskinen said. FATCA is expected to be a big step forward in tax compliance, he said."

Patrick said...

I don't know personally of any banks in the UK closing accounts of "US persons" as in Switzerland and elsewhere. However, it's frightening how easily a bank can just summarily close an account without any explanation in the UK. There are now cases of account closures that are presently being challenged in courts as breeching the Equality Act (2010), as the account closures appeared to be based solely on ethnic/national origin :
(you have to forward to 6:34 into the programme). It might also be a basis for "US Persons" in the UK to challenge account closures due to FATCA. Apologies, this might have slightly veered off the topic of the original post.

Robbo said...

Wow. Many thanks for the kind review. I hope you are right about my over-confidence in FATCA's potential. If the US was forced to back down on this, it would be a great sign and precedent for international governance generally.

Thanks for reading and reacting in such a perceptive manner!

Just Me said...

Thanks for adding this review to the FATCA debate. Just wished more Homelanders would consider what is being created. Of course, much of what we think we see is speculation, and we will only know in the fullness of time. I might not agree with some of yours, but one would be crazy to think FATCA and the evolution to GATCA will NOT have serious repercussions for the global economy.

There will be winners and losers, and frankly many more losers than anyone considers, imho. It is a level of Control unimaginable in an earlier time, and what it means for the global market and the millions of individual decisions that will be made as a result will only be known in retrospect.

Wait for 'how we got here' book. "FATCA, what happened?"

On the point of elitist and racist policy, not by intention but by impact, I think Robert is onto something here. When I told an American friend who is doing business in Africa he just laughed at the possibility that the banks he deals with will be able to comprehend and comply with FATCA.
The language barrier is a BIG one, and sophistication a challenge. It is still paper ledgers and rubber stamps there! How are they going to do it, and what does that do to their integration into a global economy if they are shut out and penalized.

Of course China maybe their answer, because they are ubiquitous in African development. (America almost doesn't exist in contrast) If China doesn't go along with the U.S. dollar extortion game, it will be interesting to watch how this develops.

Anonymous said...

Just back from the mountains - where the internet connexion is lousey - so I've just read this remarkable piece. Great work Victoria ! This is true journalism. It's all said so well.
Funny thing. Nobody back home, except for Nina, seems to be taking any of this seriously. Or do they know about it ???

Victoria FERAUGE said...

@Christophe, Fabulous links. Thank you. On my to-read list is Christian Chavagneaux's Les paradis fiscaux.

@Robert, it was my pleasure and I liked the book very much. I hope that was properly conveyed in my review. If not, well, let me say it here.

@Just Me, Got similar reactions from folks in southeast Asia.

@anonymous, can't entirely blame them. The US has a lot of problems right now. The trick is to point out that FATCA not only won't help fix it but could actually make it worse.