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Friday, April 10, 2015

FATCA/CRS: Promises, Promises

These days countries all around the world are agreeing to Automatic Information Exchange systems to share taxpayer information with each other.   The United States kick-started the trend with FATCA (the Foreign Account Tax Compliance Act), and early last year the OECD unveiled the CRS (Common Reporting Standard).  

No nation-state gives up sovereignty unless there is a perceived gain. The larger context, and the way Automatic Information Exchange has been sold to electorates, is the worldwide War on Tax Evasion.
It's a simple message that resonates with voters everywhere:  If we sign up for these systems, politicians promise, we will catch the traitorous tax-evading 1% ,  Not only will that bring in lots and lots of cash, but we will have struck a mighty blow on behalf of justice and fairness.  Who could possibly argue with that? (Citizens who have something to hide is the usual response.)

People should know better than to believe the promises of politicians.  George Orwell put it beautifully when he said,  "Political language... is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind."

So where is the wind?  The fact that the information to be exchanged under FATCA and the CRS is not about taxes owed, it's about chunks of money sitting out there in the world with names and nationalities attached to them.  If X has 50,000 Euros sitting in an account in Y country, it does not automatically mean that he or she owes taxes on that money, or that the account was not reported to the relevant authorities.

The CRS asks for the following information:  Name, address, taxpayer identification number, date and place of birth, account numbers, account balances, the total gross amount of interest, dividends or other income, and mortgage payments.

There is no field in CRS (or FATCA) that says, "Tax compliant/Not tax compliant."  From these raw data it is simply not possible to draw a straight line from an existing account to a tax evader.  The information provided must be checked against tax records, and double-checked with the individual's citizenship and residency records to determine if the person really is eligible for an audit by a country's tax authorities.

The exchange of information by itself is no guarantee that tax money will be flowing like water into a country's coffers from abroad. It is perfectly possible that a country will receive information from another country, and, after investigation,  discover that most of the high-value accounts have (with the help of international tax attorneys) been reported and all taxes paid, and the only accounts left on the table are ones that are low-value and won't yield much revenue.

Everyone should understand this:  countries have no idea right now how many reportable accounts are out there, how much money is in them, and how much of that money is taxable.   They are making promises based on guesses.

But there other ways that this information exchange systems can be used that have nothing to do with tax evasion in a globalized world.   Two that come to mind are:

Tracking migrants and controlling global mobility:  In principle, with a unique international identification number, people become trackable wherever they or their money go in the world.  A US Person moves from Sacramento, California to Shanghai, China to  Paris, France and every time he opens a bank account, there he is with a local address.  That's not a bug; it's a feature.

Many countries like the US do not have a reliable means of tracking where their citizens go, and what they do, when they leave the home country.  FATCA/CRS serves as a kind of extraterritorial census and a way for governments to track emigrants.  Or where they suspect that some homeland citizens have connections to other countries (not always ones they like), these agreements give governments yet another way to keep an eye on them.  With that in mind, it might be very interesting for the French government to know that someone in France has a house and a mortgage in  Algeria.  Or that a citizen has authority over the accounts of an NGO in Latin America or Africa.

Taxing the diaspora:  Most countries in the world have residence-based tax systems.  What that means is that only residents of their country get chased for taxes either in that country itself,or passive or active income earned abroad.  The US is unique in that it has a citizenship-based tax system which means a US citizen is taxed on his income wherever he lives. If he lives in Japan, he must file tax returns locally and with the United States on whatever he made in both countries.

There are countries that dream of doing the same thing.  Imagine all those French in California.  Or all the Chinese in Canada.  Or the Japanese communities in France. So far, citizenship-based taxation US-style has been something of a bust because there has never been a reliable system for tracking Americans abroad, much less what they were doing or earning.

So we could look at FATCA/CRS as an experiment:  Has the US finally found an efficient enforcement mechanism for their citizenship-based tax system?

International migrants everywhere should be very concerned if the answer turns out to be "yes".  Because if CBT works, then there is every incentive for states to say to their diasporas, "You may have emigrated, but as long as we claim you, you will share your fortune by paying taxes to the home country in addition to the ones you pay locally."

Everyone is shouting so loudly about tax evasion that it's hard to think clearly over the din.  So many vague promises on one hand, and so little evidence on the other.  One way to cut through the self-righteous rhetoric is to ask some simple questions:   What are the success criteria for an Automatic Information Exchange system?  How much tax money will each country recover if FATCA and CRS "work"?  Not back-of-the-envelope guesstimates, but hard data and real numbers backed by serious studies.

So, is it the money or the information that make FATCA and CRS attractive?


Politicians' promises of  money, money, money may be so much hot air; but the information itself is solid gold.


Anonymous said...

Yup. Nail hit on head.


There are many VERY CHALLENGED countries involved in this. Some of these countries may not be challenged until later on. For example, remember how stable Egypt and Algeria and Lebanon had been?

Croatia is now one of those trusted countries. 15 years ago, Catholic Croatia's current politicians were slaughtering Serbian Orthodox Christians (and vice versa). If you think such a war is over in their minds, just try driving a car with Serbian plates through any of the surrounding countries.

Other trusted countries included Bahrain, Qatar, Saudi, Thailand.

Within many countris, Place of birth can be used to determine ethnic characteristics such as religion. Imagine that a troubled country is forced by CRS to segregate its own population.

The other characteristics we learned about GATCA (CRS) is that it enables EITHER RBT or CBT. When GATCA is implemented, all countries will then have the data necessary for them to implement CBT.

CBT could very well be a tool in troubled countries such as Greece or Croatia, whose population only has work opportunities during the tourist season, and whose population must commute globally in order to find employment. And govts of countries such as Greece can be wildly influenced by hyped-up propaganda such as the US media & political propaganda that is directed at US expats.

As FATCA gets its challenge in the courts, and as FATCA's lack of reciprocity (together with its status as being an attractor of global financial deposits) becomes evident, the world's globalist call for GATCA is going to push hard on USA.


Tim said...

There are a couple of different issues coming into view though.

1. France and Germany have in recent months re-iterated the non negotiability of freedom of movement within European Union in light of rather unsurprising moves by the UK to water down such provisions.

2. The current prime minister of France was born in Spain. Is he going to pay taxes to Spain in light of CRS/CBT. I have a feeling he is not.

3. The EU Commission is marking noises(albeit very faint) that CBT is probably incompatible with EU law.

Tim said...

I will also say I am not part of "everyone" who is shouting about tax evasion. While this is my personal opinion and NOT that of ADCS or Brock I would just assume get rid of the income tax altogether even on the basis of residence and instead raise government revenues through VAT. Of course all birkenstockers sitting on the patio smoking clove leaf cigarettes at Last exit on Brooklyn will whine and complain about the unfairness and unprogressivism of VAT. My response is that it is time for "us" to tell the birkenstockers at Last exit on Brooklyn just how really stupid they are right to their face.

Anonymous said...

Good work, as usual Victoria. The problem is that all our griping seems to be going nowhere, even if there are some rays of sunlight in this dark tunnel named "Where are we, and where do we belong?" Is there a class action suit against this horrible mess ? If so, where do we go to find it ?

eg said...

@ Anonymous, the only way out of this mess is to elect a president who will take down FATCA. So far the only one is Rand Paul. Rand Paul seems to care about privacy and basic freedom.

bubblebustin said...

The US bailed on participating in the OECD's last efforts to create a CRS, and every indication is that they'll do it again. With the US's inability to provide other nations with reciprocity concerning FATCA, it would appear that the world's strongest proponent of tax transparency is in fact one of the world's worst offenders and wishes to remain so.

Victoria FERAUGE said...

@bubblebustin, I'm very interested in knowing why the US decided not to participate in the CRS. Do you know what the rationale was?

@anonymous, Yes, you are absolutely correct and I'm delighted to say that there are folks out there who are working on this. Two lawsuits, Ams Abroad orgs and other like the Brockers. I'm working on a series of posts about each one. Hope to get that finished and posted soonest.

Anonymous said...

Call me a pessimist, but even both lawsuits succeed, do you think that the discrimination will stop?
Do you think that FFIs/prospective employers won't still be afraid of engaging in relationships with Americans?
Can the harm really be undone?
It's not just about FATCA. This whole mess has made clear to the rest of the world that the US has CBT. Even if the IGAs are struck down, the banks will still be afraid of the possible huge fines that they can get for allowing tax evasion. I think that until the US switches to RBT and makes that public, discrimination against Americans abroad will remain.

@eg, with regards to having a Republican president, I recently read the following article:

Can a Republican get the 270 electoral votes needed to win the presidency? From what the article says, it's going to be hard...

Oversea Business said...

This is a dumb, short sighted law that permanently undermined American's influence overseas.

The real fat cats are long gone.

China and Russia will be the real benefactors from FATCA .

bubblebustin said...


This may offer some insight into why the US didn't participate in the first go-round (courtesy of Prof Christians). Sounds like BS to me!

Anonymous said...

Please check this out:

Victoria FERAUGE said...

@anonymous, I see your point. What I was hearing from people in Washington last year is that they believed that the discrimination would go away when FATCA becomes GATCA and all foreigners everywhere start having their accounts reported. I have a hard time understanding their logic. For me, this just means that foreigners everywhere will start experiencing discrimination. How exactly is that supposed to improve matters?

@Overseas Business: We think alike. Yes, the law was passed in 2010 and anyone who had money (and something to worry about) and saw it coming has taken steps to avoid FATCA. So that leaves all the folks who didn't know and have just enough money to be subject to reporting but not enough to pay 500 euros an hour for cross-border tax specialist.

@bubblebustin, Thank you. Yes, I've always thought of FATCA as the US way of getting one step ahead of other information reporting schemes - ones they don't like because it makes the US do what they are asking other countries to do. We can't have THAT, now can we? :-)

@anonymous, Thanks for the link. I wrote about this in another post here:

I would like to do an update but so far haven't had any success in getting ahold of them.