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Tuesday, March 18, 2014

FATCA: La chasse aux coupables

“If the soul is left in darkness, sins will be committed. The guilty one is not he who commits the sin, but the one who causes the darkness."

Victor Hugo
Les Misérables

There is an excellent article, How to Avoid FATCA – Tips From Senator Levin, by Virginia La Torre Jeker, an international tax lawyer in Dubai,  up on AngloInfo.

The article is an analysis of a report that was published last month by the U.S. Senate Permanent Subcommittee on Investigations called Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts.

A great read and I recommend it to all of you.  Allow me to make a few additional points just to stir the grey matter a bit more:

Billions, Billions Out There!  The American government has no clue how many American citizens there actually are outside the United States, only estimates.  So how do they know how much potential tax revenue there is out there beyond the borders of the United States?   They don't. Those much cited figures of 150 - 200 billion USD in uncollected U.S. taxes were pulled out of thin air.

You heard me.  All those figures being cited in the media by various organizations and by US lawmakers are just wild ass guesses.   Professor William Byrnes took a stab at tracking down the origin of these numbers and they seem to have originated in magazine articles.  Not one can cite a reliable methodology that might make these figures credible.  In fact when the former IRS Comissioner was asked about them in 2009, he admitted:
“Not that I am aware of. I mean, estimating how much money that is overseas and not being paid to the government. As far as I am aware, there is no credible estimate because it is kind of a chicken and egg. It is over there and we have not found it, it is hard to estimate what is there. And all estimates that I have seen have not broken down criminal versus civil because, again, until we see the cases, it is hard to say.”
So FATCA is basically a fishing expedition.  They have no idea how much money is out there in uncollected U.S. taxes.

FATCA is Already a Failure?:  Reading the Senate report one is struck by their pessimism. They are saying that FATCA as it is being implemented isn't going to work: 
"FATCA will not, in fact, solve the disclosure problem. FATCA’s implementing regulations have created multiple loopholes, with no statutory basis, in the law’s disclosure requirements (page 6). 
In this Forbes article, Andrew Quinlan of the Center for Freedom and Prosperity agrees but he talks about something the report was completely silent about:  reciprocity.  

A Blame Game?:  So here we have an extraterritorial U.S. law passed in 2010 to deal with a "problem" that no one can define with any precision, and for which no actual cost-benefit analysis was ever done. 

Furthermore, even before implementation, FATCA already has had a number of serious consequences:  it's costing countries all around the world an arm and a leg; it's making it very tough for US Persons abroad to have checking, savings and retirement accounts in their host/home countries; and it's generating expectations of information exchange reciprocity that everyone admits will be a very tough sell in the United States.  

Now, four years later, the very people who passed the law are saying it's doomed and it's not their fault.  It's those darn bureaucrats who are responsible if FATCA fails to find those tax evaders because they weakened FATCA when they wrote the regulations and negotiated those foreign agreements:
"They point out that the Swiss have signed an intergovernmental agreement that requires all Swiss banks to comply with FATCA’s disclosure requirements. But FATCA’s disclosure requirements have been limited and weakened by its implementing regulations, and may allow many U.S. taxpayers to continue to conceal their accounts in Switzerland and elsewhere." (Page 172)
This looks an awful lot like what the French call  la chasse aux coupables (the hunt for the guilty). 

The report implies that elements of the final regulations and those negotiated agreements do not have the support of U.S. lawmakers.  That's a very troubling message to send to banks that desperately need those final regulations to be frozen, and to all the countries that have signed (or are about to sign) FATCA IGAs.  

It's too soon to tell if FATCA will be a catastrophic failure, a limited success, or a rousing triumph, but it's not a good sign that U.S. politicians are already looking to assign responsibility for its shortcomings.  

Success or failure, pro-FATCA or anti-FATCA, let's put the blame for the outcome of this legislation squarely where it belongs:  the U.S. lawmakers who made the darkness.


Northerndar said...

You did an excellent job of dicing up this report. You put it perfectly when you wrote those who created this darkness (FATCA ) are responsible.
Please pass out what you wrote today to those you meet up in DC,

Blaze said...

If they had stuck with the origina "simple premise" of 1099s for US residents with true offshore accounts, they probably could have implemented FATCA long ago and actually recovered some money.

Why can't the Americans do anything simply? Could it be because the more complicated they make things, the more jobs for bureaucrats and the compliance complex?

Patricia said...

FATCA is unnecessary the US already had all sticks and carrots to crackdown on tax-evasion with Swiss bank

FATCA is counter-productive because it seeks the same money as the penalty driven OVDI programs. Increased compliance fewer penalty dollars, more renunciations less tax dollars.

FATCA is a massive cover up of the actual cause of the fiscal gap. Most of the fiscal gap is by multi-nationals which lobby for concessions in the tax code thereby decreasing tax revenue and also asking for subsidies for their industries. FATCA allows congress to claim credit for trying to solve while continuing to make it worse by creating more tax concessions and giving more subsidies

Cornoffthecob said...

Please tell them in Washington, I am a patriot: "Persecuted American Taxpayer Resident In Overseas Territory."

Thanks and good luck.

Ellen Lebelle said...

Chasse aux coupables is misleading in that it is not meant to catch just the guilty. It's a chasse aux innocents, too. It's a fishing expedition with a very wide-cast net, meant to take in everyone out there, innocent or not, whether they owe any tax, or not.

bubblebustin said...

Well, US lawmakers have created a bit of a conundrum for themselves, haven't they? With any luck, what Virginia describes as a "tempest in a tea pot" will become a pressure pot that will blow the lid off of FATCA. All that's needed is a little heat. This could be a great opportunity for the creators of FATCA to kill the darkness they created by claiming it doesn't go far enough, and at the same time save some face. It will be interesting to see how this unfolds in DC. Enjoy your front row seat for as long as you're there, Victoria.

bubblebustin said...

The report didn't mention another of FATCA's reporting flaws: how a search for indicia will result in false positives and false negatives, thereby allowing what will surely be a significant number of USP's to pass undetected. For example, unregistered US citizens born abroad, green card holders and naturalized US citizens can easily pass undetected. Self-certification may not help either, as many US persons are unaware of their US personhood. How many people will just plain lie if they can get away with it? When the FATCA witch hunt comes fully into play, what affect will this discrepancy have in those who are targeted, when they know that those equally US persons can go about their normal lives? This for me is another of FATCA's fatal flaws that should be considered by US lawmakers, the pitting of American against American for some hare brained scheme that won't even work.

P. Moore said...

It will be interesting for you to take the temperature in the 'FATCA kitchen'. I bet it is getting hotter in there and I suspect many more may not be able to take the heat when the summer rolls around, after July 1st.

Sally said...


Once again, you're right on the money. It was the politicians who dunnit. Period, end of story. Trying to translate stupidity into workable regulations is doomed to fail.

Of course the IRS also has some idiots. For instance the idea that someone who did not submit FBARs because he or she was not aware of being a US citizen ought to pay 5% of everything they ever owned is simply crazy. The law says no penalty at all if there is reasonable cause and ignorance of US citizenship is the most obvious reasonable cause of all.

bubblebustin said...

@P Moore

...and so confirmed by former IRS Deputy Commissioner, Mark Matthews here (thanks Tim):

Anonymous said...

So we're being persecuted because of data equivalent in reliability level to a scribble on a cocktail napkin.

"Lies, damn lies, and statistics",_damned_lies,_and_statistics


Victoria FERAUGE said...

@Blaze, This reminds of a book I read recently The Collapse of Complex Societies. The authors says that the move toward more and more complexity has a point where the effort does not lead to a return. At that point things began to break apart and people start to defect.

@Cornoffthecob: LOVE it!

@Ellen, Yep. And that's what really surprised me in the report. They are yelling at the people who did their best to implement something that just wasn't going to work otherwise.

I liked the way Sally put it:
"Trying to translate stupidity into workable regulations is doomed to fail."

@Badger, Amazing, isn't it? But we can see how welcome the message was to the homeland public. "If those people pay up then YOU will pay less." Very attractive proposition. It's complete hooey but what scares the beejesus out of me is what will happen when they don't see the money. What is more likely?
1. They will admit they are wrong and give up.
2. They will make it true by getting rid of the FEIE and the tax credits to make sure that everyone abroad pays something to the US(double taxation).

I think 2 is far more likely than 1.

What do you think?

bubblebustin said...


1. Deep thinking
2. Shallow thinking

Which do you think US lawmakers are more capable of?

Michael Putman said...

Wow, hadn't thought of the nightmare of revoking FEIE seriously until now. That would cause this whole crisis to intensify a hundred fold, with comical BBC footage of US citizens storming their own consulates trying to renounce or else arrange for repatriation. An incredibly bone stupid move, compounding one mistake with another.

Yes, so, standard US policy, IOW, whether domestic or foreign. What are they waiting for?

Patrick said...

Almost exactly 10 years ago in the UK, there were cases of 'war babies' threatened with deportation. These children of British mothers and American GI fathers who were brought back to the UK by their mothers at a very young age when the marriages or life in the States didn't work out. They weren't registered by their mothers (this was the late 1940s, different era) There was one case of a grandmother, who worked as a cleaner (Mary Martin was her name I think), lived in the UK since she was 2 years of age being told she had two weeks to leave the country by a Home Office civil servant when she applied for a UK passport. Predictably, there was a BIG outcry in the tabloids. The Home Office minister at the time, Beverly Hughes, quickly rescinded these decisions, stating that they "defied all common sense". I imagine these people are going to be caught up in the present circumstances. What are they going to do? Go after people's semi-detached former council houses and grab their state pensions? I can see the headlines in the Daily Mail...

Victoria FERAUGE said...

@Suzanne: Gulp! Well, two I think is a hell of a lot more likely but who knows?

@Michael, Oh yeah if the FEIE was revoked that would be the second straw that broke the camel's back (FATCA was the first).

@Patrick, I hadn't heard about that. Do you have any links so I could do some research on it?

Patrick said...

The case was over 10 years ago, but there are probably quite a few people with a similar background. For these women, I imagine it was a case of life in the States wasn't all that it was cracked up to be (or the husband, or both) and it was probably take the kid and come back home. We all know, moving to a new country, sometimes the expectation doesn't mesh with reality (!)

I've found these links: